How is a mortgage early repayment charge calculated?

Full answer

Early repayment charges (ERCs) are fees lenders charge when a borrower repays some or all of a mortgage before the end of a fixed, discounted, or tracker deal's incentive period, and understanding how they're calculated can save you a significant amount when remortgaging or overpaying. **Why ERCs exist** Lenders typically offer discounted introductory rates (such as a competitive 2-year or 5-year fixed rate) on the basis that the borrower stays with them for that agreed period, allowing the lender to plan their own funding costs accordingly -- an ERC compensates the lender if the borrower exits early, whether by remortgaging elsewhere, repaying the mortgage entirely (for example, after selling the property without porting), or overpaying beyond what's allowed. **Typical tiered structure** Most ERCs are structured as a percentage of the amount being repaid early, tiered to reduce the longer you've held the deal -- a common pattern on a 5-year fixed rate might be 5% in year one, 4% in year two, 3% in year three, 2% in year four, and 1% in year five, though exact percentages and structures vary significantly between lenders and products, so always check your specific mortgage offer documents. **Worked example** On a mortgage with a £200,000 outstanding balance and a 3% ERC (for example, in year three of a five-year fixed deal), fully repaying or remortgaging the entire balance early would trigger a charge of £6,000 (3% × £200,000) -- a substantial cost that needs to be weighed against any savings from switching to a better rate elsewhere. **Annual overpayment allowances** Most fixed and discounted mortgage deals allow a limited amount of penalty-free overpayment each year, commonly up to 10% of the outstanding balance, without triggering an ERC -- overpaying beyond this allowance in a single year typically triggers the ERC percentage on the excess amount only, not the entire balance, so it's still possible to overpay meaningfully within the allowance without cost. **When ERCs don't apply** ERCs generally only apply during the initial deal period (the fixed or discounted term) -- once you move onto the lender's standard variable rate (SVR) after your deal ends, you can typically overpay, repay in full, or remortgage without any ERC, since you're no longer within the incentivised period. Some specific circumstances, such as the death of a borrower, may also be exempt from ERCs under certain lenders' terms. **ERCs and porting** As covered separately, porting your mortgage to a new property when moving house is one way to avoid triggering an ERC that would otherwise apply from fully redeeming the mortgage -- since porting keeps the same underlying deal in place rather than repaying it early. **How to check your specific ERC** Your mortgage offer document and annual mortgage statement will set out the exact ERC percentages and the specific period during which they apply -- if you're unsure, contact your lender directly and ask for a redemption statement, which will show the precise ERC (if any) that would apply if you repaid or remortgaged on a specific date. **Practical tip** Before remortgaging or making a large overpayment, always get an up-to-date redemption statement from your current lender showing the exact ERC that would apply, and compare this cost against the potential savings from a better rate elsewhere -- in many cases, especially later in a deal when the ERC percentage has tapered down, switching can still be worthwhile even after the charge.

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