What is an early repayment charge?
Written by
Joe Towner
Reviewed by
Amy LancashireAn early repayment charge (ERC) is a fee a lender can charge if you pay off some or all of your borrowing early, before the end of your agreed deal or term. It applies to both personal loans and mortgages, though the two are charged very differently and follow different rules.
Here's when an early repayment charge applies, how much it can cost on a loan and on a mortgage, and how to reduce or avoid one.
How does an early repayment charge work?
When a lender agrees to lend to you, they calculate repayments based on the full term. If you repay early, this changes how much interest you pay, so they may charge a fee to make up part of it.
How that fee is worked out depends on whether you're repaying a personal loan or a mortgage. The rules are different for each, and the amounts involved are very different too. Some borrowing carries no early repayment charge at all, so it's always worth checking your agreement before you assume one applies.
Early repayment charges on a personal loan
You have a legal right to repay a personal loan early. Under the Consumer Credit Act 1974, you can settle part or all of a regulated personal loan whenever you want, and you're entitled to a rebate on interest that hasn't yet been charged.
Lenders are allowed to charge a certain amount of interest as compensation for early settlement. The maximum is capped by the Consumer Credit (Early Settlement) Regulations 2004:
If more than 12 months of your loan term are left when you settle, the lender can charge up to 58 days' interest
If 12 months or less are left, they can charge up to 28 days' interest
There may be cases where lenders choose not to charge anything, but this will depend on the lender and your agreement. To find out exactly what you'd pay, ask your lender for a settlement figure before you repay. Our guide on how to repay a loan early walks through the process.
Early repayment charges on a mortgage
Mortgage ERCs are usually larger. They typically apply while you're in a fixed, discounted or tracker deal, and are charged as a percentage of the amount you repay, commonly between 1% and 5%.
Many lenders taper the percentage down each year as you move through the deal. For example, a five-year fixed mortgage might charge 5% in year one, falling to 1% in the final year.
You may also be allowed to overpay up to a certain amount, e.g. up to 10% of your balance each year without a charge. If you go over that limit, the ERC usually applies only to the extra amount, not the whole balance. You'll typically face a mortgage ERC if you:
Remortgage to a new lender before your deal ends
Sell your home without porting (transferring) your mortgage to a new property
Pay off the whole balance early, for example using savings or an inheritance
Avoiding Early Repayment Charges
If you plan on overpaying a loan or paying it off early, it’s unlikely you’ll avoid an early repayment charge. The important thing to work out though is whether paying a charge still leaves you better off overall. If you're moving to a much cheaper mortgage deal, for instance, the interest you'd save could outweigh the charge. Paying a loan off early could save a lot of money in interest, especially for longer loans. Work out the total cost both ways, including any fees, before you decide.
How do I find out if I'll be charged?
Personal loan: check your loan agreement, or ask your lender for a settlement figure, which shows the exact amount to clear the loan including any early settlement interest.
Mortgage: check your original mortgage offer or your latest annual statement. It will state the ERC percentage and the date the charge period ends.
Early Repayment Charges FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
