Avoid an Early Repayment Charge


Susan Kelly

Dec 30, 2022

Congratulations on your success if you have the good fortune to be able to pay off your mortgage earlier or have found a better rate to switch to. However, before you cancel your existing mortgage and go on to a new one, you should determine whether or not you will be subject to an early repayment charge. This charge has the potential to nullify whatever financial gains you may have earned as a result of switching lenders or prepaying your loan.

There will inevitably be moments in your life when you will be forced to back out of a mortgage agreement. You may have to relocate because you and your spouse have decided to go their separate ways. Before making any significant choices, it is essential to understand how early repayment costs operate and the amount of money it will cost you to get out of your arrangement.

When Does An Early Repayment Charge Apply?

If your mortgage offer includes early repayment penalty, it will typically become effective during tie-in term if any of the following conditions are met:

  • You decide to move to a different mortgage package with a different interest rate.
  • When you overpay (or finish paying off) your mortgage, you do so over the overpayment allowance set by the lender.
  • You decide to sell your home, but your mortgage cannot be transferred to your new home.
  • Early repayment fees are often only applicable to mortgages with fixed rates, although they are also possible with mortgages with variable rates, such as capped and discount arrangements.

Why Are There Early Repayment Charges?

Mortgage early repayment penalties are a fee assessed by the lender and paid by the borrower if the borrower pays off their loan sooner than expected. The charge enables lenders to recoup the expenses and interest that they would have otherwise received during the duration of the transaction that is being terminated early.

When you take out a loan, the lender's purpose is to earn a profit off of the interest you pay. This helps to ensure that they will be in their pocket as a result. Although this may not be of much solace to the borrower, the first interest rate provided is contingent on your continued participation in the transaction for a certain amount of time.

How Much Is The Fee For Making An Early Repayment?

If you pay off your mortgage loan early, the typical penalty ranges from 1 percent to 5 percent of the total amount still owed on loan. This may be structured in stages, beginning with a greater proportion early in the transaction and decreasing as it draws closer to the deal's conclusion, depending on the lender. Waiting until you move up to the next tier will result in reduced costs for you, as this indicates.

One example is as follows: Let's say you are now in the second year of a fixed-rate agreement for five years and wish to move to a cheaper rate with another lender. If you still owe £120,000 on your mortgage and there is a 3% charge, you will be responsible for paying $3,600. If the charge is reduced to 1% of the loan in the fourth year, you will be responsible for paying $1,200. Therefore, the early repayment charge will decrease the longer you wait before making the payment.

You should be aware that if you are moving to a different rate with your existing lender, the lender may waive early repayment charge if you are getting close to the conclusion of your current agreement. This is something to keep in mind if you are only switching rates.

Early Repayment Charge: Way to Avoid

The most effective strategy for avoiding early repayment charge is to understand the terms of your agreement thoroughly and to avoid those terms consistently. The following are some potential alternatives:

  • Find out how much of your annual payment you may go over without incurring penalty, and then make sure you stay within that amount. The annual amount is typically at most 10% of the total balance of your mortgage.
  • Think about going with a plan that doesn't penalize you for paying it off early. Make sure that your calculations consider the interest rate and any costs associated with the arrangement.
  • Please observe the deadline; beyond that point, early repayment fees will no longer be assessed. This is often associated with the conclusion of your contract term; however, some tie-in periods might be extended for a longer amount of time.
  • Choose a shorter first contract if you know you will be moving soon or are planning to look for a better rate soon.


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