ERC — Early Repayment Charge
A fee charged by your lender if you repay your mortgage or overpay beyond allowed limits during a fixed or discounted rate period.
What is an Early Repayment Charge?
An Early Repayment Charge (ERC) is a penalty fee your mortgage lender charges if you pay off your mortgage early, switch to a new deal before your current product ends, or overpay more than your lender's annual allowance. ERCs exist because the lender has committed to lending you money at a specific rate and loses expected interest income if you repay sooner than agreed.
How ERCs are calculated
ERCs are typically expressed as a percentage of the outstanding mortgage balance. They often decrease each year of the deal. For example, a five-year fixed rate might carry ERCs of 5% in year one, 4% in year two, 3% in year three, 2% in year four, and 1% in year five.
On a £200,000 mortgage, a 3% ERC would cost you £6,000, which is a substantial sum that can easily outweigh any savings from switching to a cheaper rate.
Why it matters
ERCs are the key factor when deciding whether to remortgage before your current deal expires. Even if interest rates have dropped significantly, the ERC may wipe out any potential savings. This is why most mortgage advisers recommend waiting until your deal ends or is within its ERC-free window before switching.
Overpayment allowances
Most UK lenders allow you to overpay up to 10% of your outstanding balance each year without triggering an ERC, though some allow less. It is essential to check your specific mortgage terms, as exceeding this limit means the charge applies only to the excess amount with some lenders, while others may charge on the full overpayment.
Important caveats
ERCs do not apply once you move to your lender's standard variable rate (SVR) after your deal period ends. Some tracker mortgages also come without ERCs, giving you more flexibility. Always factor in ERCs when comparing the true cost of switching deals early versus staying put.