Early Repayment Charges — When Remortgaging Costs You More Than You Save

What Is an Early Repayment Charge?

An Early Repayment Charge (ERC) is a fee charged by a lender when you repay all or part of a mortgage during a restricted period — usually the length of the fixed-rate or tracker deal. For a five-year fix, the ERC applies for those five years; once the fixed term expires, no ERC applies.

ERCs are expressed as a percentage of the outstanding loan balance (or the amount being repaid early). They compensate the lender for the funding costs incurred when they arranged fixed-rate money in the wholesale market to back your mortgage.

Use our [remortgage savings calculator](/remortgage-calculator) to calculate whether the savings from a lower remortgage rate justify any ERC you would incur.

Typical ERC Structures

**Stepped rate (most common for fixed-rate mortgages):**

**Flat rate:** Some products charge the same ERC for all years of the deal — typically 2–3%.

**Declining percentage tied to remaining term:** Some lenders calculate ERC as a proportion of remaining term rather than a stepped schedule.

**Amount the ERC applies to:** On a full remortgage, the ERC applies to the entire outstanding balance. On a partial overpayment, it applies only to the excess above the annual 10% allowance.

Calculating the ERC on Your Mortgage

ERC = outstanding balance × ERC rate for your current year

**Example:**

• Outstanding balance: £215,000
• Currently in year 3 of a five-year fix
• ERC rate: 3%
• ERC: £215,000 × 0.03 = **£6,450**

This £6,450 would be deducted from the proceeds of the remortgage (or added to your closing statement) when you switch.

When Paying the ERC Is Worth It

The break-even calculation is: how long will the monthly saving on the new rate take to recover the ERC cost?

**Break-even = ERC cost ÷ monthly saving on new rate**

**Example:**

• ERC: £6,450
• Current rate: 5.5%
• New remortgage rate available: 4.2%
• Balance: £215,000 over 18 years
• Current monthly payment: ~£1,629
• New monthly payment: ~£1,459
• Monthly saving: £170
• Break-even: £6,450 ÷ £170 = **38 months (3 years 2 months)**

If the new deal is a five-year fix and there are at least 38 months remaining in it before the next remortgage, switching is financially worthwhile. With 24 remaining months on the new deal, it would not make back the ERC.

When the ERC Makes Remortgaging Uneconomical

**Rate differential is small:** If rates have only fallen by 0.2–0.3%, the monthly saving may be too small to justify a large ERC. On £200,000, a 0.2% rate reduction saves approximately £33/month — recovering a £5,000 ERC would take 150 months (over 12 years).

**ERC is in an early, high year:** In year 1 of a five-year fix with a 5% ERC, you are paying the maximum charge just as the rate environment is uncertain. Unless rates have fallen dramatically, it rarely makes sense to exit in year 1.

**Short remaining term:** If you have only two years remaining on the fix, you may be better positioned to wait for the ERC to expire naturally (reducing to 2% or 1%) before remortgaging.

Alternatives If the ERC Makes Remortgaging Too Expensive

**Wait for the ERC to reduce or expire.** ERCs reduce each year; the closer you are to the end of the fixed term, the less the charge. If you are in year 4 of a five-year fix with a 2% ERC, waiting 12 months eliminates it entirely.

**Make penalty-free overpayments in the meantime.** Use your 10% annual allowance to reduce the balance. A smaller balance means a smaller ERC if you do decide to exit early, and a lower balance at remortgage improves your LTV position.

**Part-and-part approach (rare but possible).** Some lenders allow you to remortgage part of the balance to a new deal while leaving the rest on the existing fixed rate. This is uncommon and complex — discuss with a broker if you think it applies.

**Product transfer.** Your existing lender may allow a rate switch to a new product for a much smaller fee (or sometimes free) even during the fixed-rate period. This is not universal, but worth exploring.

ERC Planning at the Point of Taking a New Mortgage

When choosing between a two-year, three-year, and five-year fix, the ERC period is as important as the rate:

• A two-year fix gives you flexibility sooner — in two years you can remortgage without any ERC
• A five-year fix offers rate certainty for longer but locks you in with a significant ERC for five years
• If you anticipate a large change in circumstances within three years (job change, family expansion, moving property) a shorter fix may be worth a slightly higher rate for the flexibility it provides

Use our [remortgage savings calculator](/remortgage-calculator) to compare the total cost of different fixed-rate term options over your planning horizon.