What is an Early Repayment Charge? (2024)

FAQs

What is an Early Repayment Charge? ›

If you pay off your mortgage early, or overpay by more than your lender allows, you may have to pay an early repayment charge. This is so your lender can make up for the lost interest they would have made over the remainder of your mortgage agreement.

How to avoid early repayment charges on a mortgage. If you want to avoid paying an early repayment charge on your mortgage then you should: Avoid overpaying your mortgage by more than allowed under the terms of your mortgage deal - usually 10% of the outstanding balance each year.

For example, if you had a 5 year fixed interest rate mortgage, you'd start off with a 5% ERC in year 1, which reduces to 4% in year 2 then 3% in year 3 and so on. So, if you're closer to the end of your mortgage term your early repayment charges could be lower.

Early repayment charges for personal loans are generally more cost effective the earlier you repay the loan. If you are close to the end of your repayment term, you might find that the additional interest costs you more than letting the repayment schedule run its course.

Early repayment fees are designed to cover the lender's loss incurred if you end your loan early. To fully understand why these fees are sometimes imposed, it helps to know the backstory of your loan (cue flashback music): Your personal loan is approved. Your lender borrows money in order to provide your loan.

If you remortgage with the same lender, known as a product transfer, instead of remortgaging with a different lender your lender may waive the ERC. But you'll often only be able to avoid an ERC if you switch in the last few months of your mortgage deal.

The faster you can pay off a loan, the less it will cost you in interest. If you can pay off a personal loan early, it can lower your total cost of borrowing, potentially saving you a considerable amount of money.

You can't avoid paying the ERC unless you wait until your mortgage deal ends and no fee applies. However, if the ERC is lower than the interest rate on your current deal or if you're switching to a cheaper mortgage, you may find that over time the lower interest rate outweighs the cost of the ERC.

Since Dodd-Frank became law, mortgage prepayment penalties can only be charged during the first three years of repayment. The penalty amount is capped at a certain percentage of your loan balance: First year: 2%

Repaying your mortgage early or paying over your overpayment allowance are some of the most common reasons an Early Repayment Charge (ERC) may apply. You'll find details of any ERC payable in your latest mortgage offer. Your annual mortgage statement will also show any applicable ERCs up to the date it is sent.

What is risk of early repayment? ›

Prepayment risk is the risk involved with the premature return of principal on a fixed-income security. When prepayment occurs, investors must reinvest at current market interest rates, which are usually substantially lower. Prepayment risk mostly affects corporate bonds and mortgage-backed securities (MBS).

Sometimes lenders like to see that you're clearing your debt over time in monthly repayments as it shows you're managing your money well. It could still be worthwhile using extra cash to repay your loan early and any negative impact on your credit file is likely to be small and temporary.

Mortgage loans with an early payment penalty are rare today, but when applicable, the fee can be steep. The penalty can be 2 percent of your loan balance within the loan's first two years and 1 percent of your loan balance in year three.

They can also choose not to charge this fee on conventional loans, so it makes sense to take out a loan from a lender that doesn't impose the penalty. Another way to avoid prepayment penalties is by holding off on refinancing or selling your home until the prepayment penalty period — usually three years — has passed.

In certain circ*mstances when porting your mortgage deal, you may need to pay an Early Repayment Charge (ERC). However your lender may refund any ERCs paid depending on when your new mortgage completes.

Before paying off a loan ahead of schedule, it's important to read the fine print. Based on the terms of your loan, you could be subject to a prepayment penalty for paying off your mortgage early. Typically, loans older than three years are not subject to this type of penalty.