Early Repayment Charges – what are they and should I worry?

Early Repayment Charge, the hidden fee that could cost you thousands

When you’re searching for loans, you need to look out for an early repayment penalty (ERC) as well as the APR. Many people just focus on comparing Annual Percentage Rates (APRs), but just because a loan may have the smallest APR, it doesn’t always mean it’s the most competitive deal. Especially when it comes to a mortgage.

An Early Repayment Charge won’t be included in the APR

The APR of a mortgage is calculated as the annual cost of the loan including the interest charge and many of the fees that the lender may charge you. But, it won’t include items such as legal fees, the costs of a valuation or product fees that are paid up front.
The APR calculation assumes that you’ll repay the mortgage over the full term (time period) you chose when you originally took out the loan, but most mortgages don’t actually run the entire full term. Typically, borrowers will hop from one mortgage to another to take advantage of better rates or to get borrow more money as they go up the property ladder. However, in return for agreeing to be locked-in to the mortgage for a set period of time, you can often benefit from lower rates.
The APR also ignores perhaps one of the largest and most often overlooked fees in the mortgage market; Early Repayment Charges (ERCs), sometimes known as an early redemption penalty.

What is an Early Repayment Charge (ERC)?

An Early Repayment Charge is a penalty you may have to face if you end up wanting to repay a loan earlier than the term you agreed with the lender, most often found hidden away in the terms and conditions of some mortgages.

How much are we talking?

Mortgages typically carry an ERC for a certain period, usually linked to the mortgage offer. For example, if you took out a five-year fixed-rate mortgage, you’d probably incur an ERC if you chose to switch products before that five-year period ended. An ERC with a penalty fee rate of 5% is common, so an Early Repayment Charge could mean you’d have to pay thousands of pounds in charges that you didn’t budget for.
In fact, a mortgage of just £150,000 could cost £7,500 to exit early. That’s on top of any other redemption costs and the costs of arranging a new mortgage (unless you were becoming mortgage-free).

Predicting the unpredictable

It’s important to focus on the true cost of the mortgage over the term you’re most likely to keep it. For many borrowers, this may be for just a five-year period.
If you don’t move your mortgage over the typical five-year term, an ERC won’t apply. But, if you do decide, for whatever reason, that you need to move your mortgage before the ERC period is over, you’ll be forced to pay the penalty. And this can be significant, just see the example under ‘How much are we talking’ to get a rough idea.
No-one can be certain what the next five years will bring. If you do find yourself facing a hefty early redemption fee that leaves you feeling trapped by your current mortgage product, a good mortgage broker may have a solution for you that could ‘set you free’.

How a second mortgage could help you avoid unnecessary borrowing costs

Remortgaging isn’t the only option when it comes to borrowing larger sums over a longer term. Using a second mortgage may be a cheaper option.

Unlike with many remortgages, with a second mortgage (sometimes known as a secured loan) you don’t have to pay any fees until you get your money. There’s no upfront valuation fee, or hefty legal bill. Instead there’s just an affordable and straightforward broker fee that only becomes payable when the loan’s received.
On top of this, because you won’t need to repay your existing first mortgage, you can keep hold of any special deal you may already have, such as a low rate. Perhaps most importantly, you’ll also avoid having to pay a large ERC fee, potentially saving you thousands of pounds.

So, if you’re considering taking out a loan, remember that the APR isn’t the only factor that will impact your total cost of borrowing, especially when it comes to mortgages. If you have any questions about second mortgages, call Loan.co.uk on 0800 131 0280 or find out more about homeowner loans.

Related articles


Credit reference company helping renters become first time buyers

Rental payments recognised in credit reports for the first time. For the first time ever, tenants will be able to use the fact they pay their rent in full and on time to help build up a better credit score and credit history. That’s because..

What is credit score?

What is a credit score?

The terms credit score and credit rating often appear when it comes to your finances. Find out exactly they are and how they affect you.

The 7 benefits of getting a mortgage via a mortgage broker

Using a mortgage broker such as Loan.co.uk not only makes sound financial sense, but will provide you with all sorts of vital help. So, you’re looking for mortgage deals to help you buy a property, but..

Your guide to home renovation

Guide to home improvement loans

Making home improvements can provide you with a win-win situation. Firstly, by improving your home you’ll make it a nicer place to live. Secondly, depending on the home improvements you make, you could increase the value of your home.

Hope For ‘Mortgage Prisoners’

Hope For ‘Mortgage Prisoners’

With all the joy/bewilderment generated by seeing Theresa May dancing on the stage at the recent Conservative Party Conference, it was easy to miss a piece of potentially excellent news..

Drake's Island for sale

Island For Sale, Offers Around £6 Million

Plymouth’s historic Drake’s Island fortress on sale for £6m. The entire island’s one massive development opportunity and comes complete with a disused 6th Century barracks, a pier..

Man constructing a small model of a modern building

Fastest and slowest house price movements in the UK revealed

A new report from online estate agents, HouseSimple, has identified the fastest and slowest moving property markets in the UK. There’s great news if you’re a first time buyer; the UK housing market as a whole..

the pros and cons of 95% mortgages

The pros and cons of 95% mortgages

A 95% mortgage allows you to borrow up to 95% of the total cost of your property, so you could buy your dream home with a deposit of at least 5%. With a 95% mortgage you only need to get..

Buy to let tax rules

Buy-to-let tax rule: is using a limited company better for tax?

If you are a buy-to-let owner, you could start to feel the pinch of the 2017 tax changes – but what are your options to help prevent you from slipping into the red…

Remortgage your property with loan.co.uk

What does APR mean?

If you’re looking to borrow money in the UK, using anything from a mortgage or remortgage to an unsecured loan or secured loan, you’re absolutely certain to come across the term ‘APR’. But what exactly does it mean and why is it important to understand it?






In the

Shall we get started on building your bespoke loan?

Simple online application Online loan application icon

Share This