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.

Paying an early repayment charge can make sense if: You can get a remortgage deal with a much lower monthly payment than your current one. If you find a deal with a rate that's lower than your current one , use our Ditch your fix calculator to check whether it's worth paying to switch.

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.

Some lenders may waive the early repayment charge if you've only got a few months left on your mortgage deal. However, this is often only the case if you take out a new mortgage with your current lender – known as a product transfer.

You may be able to negotiate a lower ERC with your lender, especially if you are a loyal customer or if you are close to the end of your mortgage term. However, they are under no obligation to deviate from the initial terms of your contract. Wait until the end of your introductory period.

Paying off a loan early could save you money in the long term as it can reduce the total amount you need to repay. Bear in mind that you need to account for any early repayment charges to help decide if it's the right choice for you.

Remember, federal law prohibits prepayment penalties above 2 percent of the loan amount. This is the highest possible amount you could pay. Keep in mind: Dodd-Frank's rules apply to conventional fixed-rate mortgages originating as of January, 2014.

Does early repayment affect credit score? ›

Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.

The purpose of a prepayment charge is to compensate the lender for the economic costs it incurs when a prepayment amount exceeds the prepayment privileges permitted under the mortgage.

These overpayments help you pay off your mortgage sooner but your monthly payment stays the same.

Get a mortgage without charges

Your lender may offer a mortgage deal without early repayment charges – ask about this when agreeing your deal. Some fixed rate mortgages don't include early repayment charges, or you may be able to avoid paying one after repaying for a number of years.

The Downside of Mortgage Prepayment

Prepaying your mortgage ties up your funds in your home, potentially leaving you with less liquidity for other financial needs or opportunities.

The interest rate differential (IRD) is one type of prepayment charge you may be required to pay to your lender when you pay all or part of the mortgage before the term ends. For most fixed-rate closed mortgages, the prepayment charge is usually 3 months' interest or the IRD, whichever is greater.

Negotiate To Remove The Prepayment Clause

You can always try to negotiate having it removed from the contract; ask your lender if they will waive the fee. If they agree, make sure you have it in writing. You can also ask your lender for a quote without the penalty, but remember, that might increase your interest rate.

By carefully reviewing the loan terms, negotiating with lenders, and considering loans without prepayment penalties, you avoid unnecessary costs. Always read the details and look at every alternative that will enable you to make informed choices.

You can't prepay, renegotiate or refinance a closed mortgage before the end of the term without a prepayment charge. But, most closed mortgages have certain prepayment privileges, such as the right to prepay 10% to 20% of the original principal amount each year, without a prepayment charge.