Early Repayment Charges: When Paying One Is Worth It

This week the average two-year fixed rate sits at 5.96% and the five-year at 5.99%, according to Moneyfacts figures published on 19 October. With the Bank of England's next decision due on 5 November, and most economists expecting Bank Rate to rise from 3.75% to 4%, I'm being asked one question more than any other: "Ian, I'm still in my deal. Should I just pay the penalty and get out?"

It's a fair question, and the honest answer is: sometimes, but only after doing the sums. Let me show you how I go about it.

What an early repayment charge actually is

An early repayment charge, or ERC, is the fee your lender charges if you repay some or all of your mortgage during a fixed or discounted period. It's usually a percentage of the balance you repay, and it often steps down each year. For example, a charge of 5%, 4%, 3%, 2% and 1% across a five-year deal is a common pattern, though every lender is different.

for the exact figure. Don't rely on what a friend paid, or on what the lender's call-centre thinks. Ask for a written redemption statement showing the precise cost on a specific date.

Why leaving early rarely stacks up right now

When rates fall, paying an ERC to switch to a cheaper deal can make sense. Today the picture is very different. Fixed rates have been creeping up, and if you took your current deal when rates were lower, leaving early would usually mean swapping a cheaper rate for a dearer one and paying a fee for the privilege.

Take a £200,000 balance on a 4.2% fix with two years to run. Moving to a 5.96% deal would add roughly £3,500 a year in interest, before you've even counted a 3% ERC of £6,000. That's a poor trade, however you dress it up.

The situations where paying an ERC can make sense

There are genuine reasons to pay one. These are the ones I see most often:

If your current rate is higher than today's market, the saving may outweigh the charge.
Sometimes the ERC is unavoidable, so it's worth building into your moving budget.
Divorce, buying out a partner, or a big home improvement can all force a restructure.
If you're now in a stronger position, perhaps with a lower loan-to-value, a better deal might exist, but again only the sums will tell.

Try the cheaper alternatives first

Before paying a penalty, look at what you can do without one:

Many fixed deals let you overpay up to a set limit, commonly 10% of the balance a year, without charge. Check yours.
If you're moving, you may be able to take your existing deal with you, subject to the lender's criteria and affordability at the time.
Charges normally stop when the deal period ends, so a short wait can be worth far more than it feels.

The timing trap near the end of your deal

If your fixed rate ends in the next six months, you can usually secure a new deal now, often with no obligation to start it until your current one expires. That lets you lock in a rate before the 5 November decision without paying a penny in ERCs. Many lenders allow offers to be arranged up to six months ahead, and some will let you switch to a cheaper product if rates drop before completion.

How I work it out for clients

My approach is simple. I take the ERC, add any fees on the new deal, and compare that total against the interest saved over the time left on your current product. If the saving doesn't clearly beat the cost, we don't move. I'll also factor in how comfortable you'd be with a longer fix, because a lower rate on paper isn't much use if it ties you in for the wrong period.

If you're on a tracker, the maths is different, since many trackers have no ERC at all. That's a conversation worth having soon, with a base rate rise on the horizon.

Before you do anything

Get your redemption figure in writing, check your end date and overpayment allowance, and talk to someone before you commit. A few minutes on the numbers can save you thousands. If you'd like me to run them for your mortgage, just get in touch.

Kindest regards

Ian