Receiving an unexpected windfall should be cause for celebration. But if your mortgage comes with early repayment charges (ERCs), putting that money towards your home loan could trigger penalties costing thousands of pounds.
On a £400,000 mortgage, these charges might claim £12,000 of your lump sum – money that should be reducing your debt instead of paying off fees.
Many homeowners find themselves in this position.
Perhaps you’ve spotted your dream home but can’t move without incurring charges. Maybe your business has flourished and you want to make larger mortgage payments. Or you might simply want the freedom to manage your mortgage on your own terms.
Understanding your options for avoiding ERCs can save you significant money and give you more control over your mortgage.
From variable rates to specialist products, solutions exist for almost every situation.
What Are Early Repayment Charges?
Early repayment charges, or ERC, are fees charged by lenders when you pay off your mortgage earlier than agreed.
These charges most commonly apply during fixed or discounted rate periods, ranging from 1-5% of the amount you repay.
On a £400,000 mortgage with a 3% ERC, you’d face a £12,000 penalty for early repayment of the whole mortgage.
ERCs come into play in several situations.
You’ll encounter them when:
- paying off your entire mortgage
- making a large lump sum repayment
- making overpayments above your annual allowance
- remortgaging before your deal ends
- selling your property during a fixed term
The percentage often reduces each year – starting at 5% and dropping by 1% annually until the fixed period ends.
Most borrowers only discover these charges when they want to make changes to their mortgage. Understanding them before choosing a mortgage helps you avoid unexpected costs and make better financial decisions.
Read more: A Guide to Early Repayment Charges
Why Do Lenders Charge ERCs?
Lenders impose early repayment charges to protect their expected returns on fixed and discounted rate mortgages.
When offering these deals, lenders plan their funding and profit margins based on borrowers staying for the full term.
For example, on a £400,000 mortgage with a five-year fixed rate, the lender has arranged specific funding to support that loan for the entire period. If you repay early, the lender loses their expected interest earnings and faces additional costs to reallocate those funds.
Fixed and discounted rates often come with lower interest rates than standard variable products.
Lenders offset these reduced earnings by ensuring borrowers remain with them for the agreed period. Without ERCs, borrowers might take advantage of low fixed rates, then switch away as soon as better deals appear elsewhere.
Think of it like a mobile phone contract – you get a better deal on your monthly payments by committing to stay for a set period. Breaking that commitment early triggers penalty charges to cover the provider’s losses.
The size of ERCs often reflects how much time remains on your deal.
A 5% charge in year one might reduce to 1% by year five. This sliding scale matches the lender’s decreasing potential losses as your fixed term progresses.
Most lenders offer mortgage options without ERCs, but typically charge higher interest rates to compensate for this added flexibility.
While nobody likes paying penalties, these charges help lenders offer competitive fixed and discounted rates to borrowers who plan to stay for the full term.
Types of Mortgages Without Early Repayment Charges
It’s not always easy to spot an ERC free mortgage deal.
Variable Rate Mortgages
Standard variable rate mortgages usually come free from early repayment charges.
While the interest rate moves according to your lender’s standard rate, you gain complete freedom to make extra payments or switch deals whenever you choose. This flexibility makes them particularly suitable for borrowers expecting lump sums or those who might need to move house at short notice.
Read more: Variable Rate Mortgages Explained
Tracker Mortgages
Several lenders offer tracker mortgages without ERCs.
These mortgages follow the Bank of England base rate plus a set percentage, giving you both rate transparency and repayment flexibility. Some track the base rate for a set period, while others – known as lifetime trackers – continue for your entire mortgage term.
Read more: A Guide to Tracker Rate Mortgages
Flexible Mortgages
These specialist mortgages build payment flexibility into their core features.
Beyond avoiding ERCs, they often include payment holidays, overpayment facilities, and the option to borrow back overpaid funds. While rates might be higher than fixed deals, the ability to make unlimited overpayments could significantly reduce your interest costs over time.
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Who Benefits from ERC-Free Deals?
Property investors need freedom to adapt to market changes. Selling a property quickly to reinvest or refinancing to expand a portfolio becomes much simpler without ERCs. For example, an investor spots a below-market property needing quick completion – having an ERC-free mortgage on their existing properties gives them the flexibility to release equity without penalties.
Self-employed professionals often see income fluctuations that make mortgage flexibility essential. A freelance consultant earning £80,000 one year might earn £120,000 the next. With an ERC-free mortgage, they can make substantial overpayments during better years, reducing their overall interest costs and mortgage term.
Those expecting lump sums particularly benefit from ERC-free mortgages. Consider inheriting £50,000 – with a £400,000 mortgage, putting this entire sum towards your balance could save substantial interest over the remaining term. Without ERCs, every penny goes towards reducing your debt rather than paying penalties.
House movers also gain significant advantages. Job relocations often come with tight timelines. Having an ERC-free mortgage means you can sell and move whenever needed, rather than waiting for a fixed term to end or paying thousands in penalties.
Making Overpayments Without Penalties
The vast majority of mortgage deals will allow you to pay off 10% of your mortgage balance without incurring ERC penalties. This is a lot of money.
And you can do this each year.
With a £400,000 mortgage, this means you can pay an extra £40,000 yearly without charges, on top of your normal monthly payments. You should be able to do this by paying extra each month, or ad hoc lumps sums when it’s affordable.
But what if you receive a larger sum?
An ERC-free mortgage removes these restrictions entirely.
You could use work bonuses, inheritance money, or monthly savings to reduce your balance whenever you want. If you received a £60,000 bonus, every pound could go towards reducing your mortgage immediately, potentially saving years of interest payments.
Read more: Should I overpay my mortgage?
Flexible Features
Beyond unlimited overpayments, ERC-free mortgages often offer additional flexibility.
Payment holidays provide breathing space during tighter months. The ability to borrow back overpayments gives you access to funds if needed. Some lenders even allow you to underpay when finances are stretched, making up the difference later when your situation improves.
These features create a mortgage that adapts to your financial situation, rather than forcing you to adapt to your mortgage terms.
Comparing Mortgages With and Without ERCs
Interest rates tell only part of the story when comparing mortgage options.
A £400,000 mortgage without ERCs might charge a slightly higher rate but could save you money if you need flexibility.
Consider a real-world comparison:
A five-year fixed mortgage with ERCs might offer a lower interest rate, but selling your house in year three could cost £9,000 in penalties. An ERC-free mortgage with a rate 0.5% higher would still save you money in this scenario, even with the increased monthly payments.
Your circumstances should guide your choice.
Moving plans, potential windfalls, career changes, or expected income increases all affect the value of mortgage flexibility. A slightly higher rate might be worth paying for the freedom to manage your mortgage as you need.
Just remember, most mortgages already let you pay off 10% per year without fees.
A Guide to Early Repayment Charges
Early Repayment Charges, ERCs, or early redemption penalties. These can apply to nearly all mortgages, our guide explains what they are and how they affect you.
Smart Strategies for Managing ERCs
Here are some forward-thinking approaches to handle early repayment charges while keeping your mortgage options flexible:
Split Your Additional Borrowing
When moving home and porting your mortgage, you might need extra funds to afford your new property. Rather than automatically choosing a new fixed rate with ERCs, consider putting the additional borrowing on your lender’s standard variable rate (SVR).
For example, if you’re porting a £300,000 fixed-rate mortgage and need another £100,000, taking this extra amount on an ERC free rate gives you flexibility. While you might pay slightly more interest initially, you’ll have the freedom to remortgage once the ported rate has ended.
Use Generous Overpayment Allowances
Most fixed-rate mortgages let you overpay 10% of your balance each year without triggering ERCs.
On a £400,000 mortgage, that’s £40,000 annually – more than most people can save. If you think you might receive large sums during your fixed term, choose lenders offering the highest overpayment allowances.
Some lenders calculate this 10% based on your original loan amount rather than the reducing balance.
This means your overpayment allowance stays higher throughout your mortgage term, giving you more flexibility to make lump sum payments without penalties.
Ladder Your Fixed Rates
Instead of fixing your entire mortgage for the same period, consider splitting it across different terms.
You might put 60% on a five-year fix and 40% on a two-year fix. This creates a natural break point where you can adjust part of your mortgage without paying ERCs.
For instance, with a £400,000 mortgage, you could have £240,000 on a longer fix for stability, while keeping £160,000 on a shorter term for flexibility. When the shorter fix ends, you can reassess your options for that portion based on your circumstances and market conditions.
This approach particularly suits people expecting their income or circumstances to change, as it provides both security and adaptability.
Note: Not all lenders will allow this.
Time Your Applications Carefully
Many lenders let you secure a new mortgage rate up to six months before your current deal ends.
By starting your remortgage search early, you can line up your next deal to start immediately after your ERCs expire.
This strategy helps avoid paying higher SVR rates while protecting you from potential rate rises. You’re effectively managing your exit from one fixed rate while securing your entrance to another, all without triggering ERCs.
These strategies show how careful planning can help you maintain flexibility while avoiding expensive early repayment charges.
We suggest discussing these options with a mortgage broker who can help tailor them to your specific situation and find lenders whose policies support your chosen approach.
How a Mortgage Broker Can Help
Independent mortgage brokers bring invaluable expertise to your ERC-free mortgage search.
They maintain relationships with lenders offering these products and often access deals unavailable on the high street. Their market knowledge helps identify which lenders suit your circumstances, potentially securing better terms than going direct.
Brokers also help structure your application to highlight why an ERC-free mortgage matches your needs.
And they will tell you if it doesn’t.
Their understanding of lender criteria increases your chances of approval while saving time on unsuccessful applications.
Read more: What does a mortgage broker do?
In Summary
Early repayment charges shouldn’t restrict your financial freedom. Whether you’re building an investment portfolio, running your own business, or simply want mortgage flexibility, ERC-free options provide solutions for your needs.
Consider your future plans carefully when choosing between mortgage types.
A slightly higher interest rate might be worth paying for the freedom to manage your mortgage without restrictions. The right choice depends on your circumstances, plans, and need for flexibility.
Ready to explore ERC-free mortgages?
Speaking with a whole of market mortgage broker can help you understand your options and find the most suitable solution. They’ll guide you through available choices and help secure terms that match your financial goals.
Need to speak with a broker? Call us on 0330 030 5050.
Frequently Asked Questions
An early repayment charge is a fee your mortgage lender charges if you pay off your mortgage or make large overpayments during a fixed or discounted period.
For a £400,000 mortgage, ERCs might range from £4,000 to £20,000 depending on your lender and terms.
Read more: A Guide to Early Repayment Charges
ERCs usually cost between 1-5% of the amount you repay early. The percentage often reduces each year. For example, a 5-year fixed deal might charge 5% in year one, reducing by 1% annually.
Many UK lenders offer ERC-free options, particularly on variable and tracker rates. However, specific products change regularly, so it’s best to check with a mortgage broker for current deals.
Many buy-to-let mortgages come with ERCs, but ERC-free options exist. These suit landlords who might need to sell or refinance properties quickly.
Most mortgages are portable, meaning you can take them to a new property without triggering ERCs. However, if you need to borrow more or your circumstances have changed, you might still face charges.
Read more: Can I move my mortgage to another house?
Yes, self-employed borrowers can get ERC-free mortgages. Lenders will assess your income through tax returns and business accounts.
The mortgage exit fee is payable when you close your mortgage account. It can also be called a deeds release fee, closure fee, exit fee or discharge fee.
This, plus all of the other fees, will be listed in your mortgage offer.
Think of it like a final admin fee.
Read more: What is a mortgage exit fee?
