Mortgage Early Repayment Charges Explained: How ERCs Are Calculated

What Is a Mortgage Early Repayment Charge?

An early repayment charge (ERC) is a fee your lender charges if you repay some or all of your mortgage before the end of a fixed, tracker or discounted deal period. It is usually expressed as a percentage of the amount repaid early, typically between 1% and 5%, and it exists because the lender priced your deal on the assumption that you would keep borrowing for the whole term. When you pay off early, the lender loses the interest it was expecting and the ERC compensates for that.

The charge is separate from any exit or “deeds release” admin fee, which is usually a flat £50–£300 and applies whenever you close the account. The ERC is the big one. On a £250,000 mortgage a 5% ERC is £12,500, which is more than most people overpay in a year.

Crucially, the ERC only bites during the deal period. Once your fix or tracker ends and you roll on to the lender’s standard variable rate (SVR), you can normally overpay or redeem the whole loan with no charge at all. The exact percentage, how it steps down, what it is measured against and any penalty-free allowance are all set out in your mortgage offer and your annual statement, so that document is always the place to start.

How Is an Early Repayment Charge Calculated?

The calculation is: ERC = amount repaid early × the ERC percentage for the year you are in. Three details decide the answer.

• The percentage steps down through the fix. Most five-year fixes charge 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five. Two-year fixes usually run 2% then 1%, or a flat 2–3%. Some products charge a flat rate for the whole deal, and ten-year fixes can carry 5–7% for several years.
• What it is measured against. Most lenders charge the percentage on the balance outstanding at the moment you repay. A minority calculate it on the original amount borrowed, which is worse for you because the balance has been falling while the reference figure has not.
• Whether the allowance is deducted first. If you overpay above your annual penalty-free allowance, the ERC is charged only on the excess. If you redeem the whole mortgage mid-deal, some lenders let you use any unused allowance before applying the ERC to the rest, while others charge on the full balance.

Here is what the step-down looks like on a £250,000 five-year fix if you redeemed the whole loan in each year (ignoring the slowly falling balance for simplicity):

The right-hand column is the one that matters for most overpayers. Because the charge applies only to the excess above the allowance, the ERC on a modest over-allowance lump sum is a few hundred pounds, not thousands. The charges in the left-hand column apply when you redeem or remortgage the whole loan, and that is where the decision gets serious.

When Do You Actually Pay an ERC?

Four situations trigger the charge during a deal period:

• Overpaying above your allowance. Most deals allow 10% of the balance a year penalty-free (our next guide covers exactly how the 10% is measured). Anything above that attracts the ERC on the excess.
• Remortgaging to another lender before the deal ends. The whole balance is repaid, so the ERC applies to all of it. Most lenders waive it if you complete within the last one to three months of the deal, and many let you lock in a new rate up to six months ahead so that the switch lands on the day the old deal expires.
• Switching products with the same lender mid-deal. A product transfer before the end date still counts as early repayment on most deals, though a few lenders waive or reduce the ERC to keep your business. Ask.
• Selling your home without porting. If you move and do not take the mortgage with you, the full ERC is due. Most fixes are portable, which lets you carry the rate to the new property and avoid the charge, as long as you pass the lender’s affordability checks again and complete within its porting window.

There are also products with no ERC at all: standard variable rates, most lifetime and some term trackers, and a small number of “no-ERC” fixes that charge a slightly higher rate in exchange. If you know you may sell, downsize or receive a large lump sum during the next few years, paying a little more for that flexibility can be cheaper than the penalty. The government-backed MoneyHelper guide to mortgage fees covers the full list of charges to check in your offer.

Does an ERC Mean You Shouldn’t Overpay?

No. The ERC on an excess overpayment is almost always smaller than the interest that overpayment saves. The real question is whether it beats waiting until your allowance resets.

Take a £200,000 mortgage at 4.5% with 25 years left and a £30,000 windfall. The allowance is 10%, so £20,000 goes in penalty-free and the remaining £10,000 is excess. In year three of a five-year fix the ERC is 3%, or £300. Here is what the three options do to the lifetime cost of the loan:

Paying the £300 ERC saves about £1,000 more interest over the life of the loan than waiting a year, so on the face of it the penalty pays for itself. But that ignores what the £10,000 earns while it waits. In an easy-access savings account at 4% it makes £400 gross, or about £320 after basic-rate tax once your Personal Savings Allowance is used, and roughly £240 for a higher-rate taxpayer. Set against the £450 of mortgage interest it would have saved in that first year, the true cost of waiting twelve months is only £50–£210, well under the £300 penalty.

So the rule of thumb is: if the ERC on the excess is bigger than the gap between your mortgage rate and your after-tax savings rate, wait for the allowance to reset. In the final year of a fix, when the ERC has dropped to 1%, paying it is often marginally better. In year one at 5% it almost never is. And if the alternative home for the money is a Stocks & Shares ISA rather than a savings account, the case for waiting gets stronger still, as our pay off the mortgage or invest guide sets out.

Is It Worth Paying an ERC to Remortgage to a Cheaper Rate?

This is the question anyone who fixed at the 2023 peak has asked. The test is simple: interest saved over the remaining deal period minus the ERC minus the new deal’s fees. If the answer is positive, switching wins.

Suppose you have a £200,000 balance with 23 years to run and two years left on a five-year fix, the ERC is now 2% (£4,000), and a new two-year fix is available at 4.4% with a £999 fee:

The break-even in this example sits at a rate gap of around 1.3 percentage points. Below that, you are paying £5,000 up front to save less than £5,000 over two years, and the lower monthly payment is an illusion. Three things shift the answer: a smaller ERC (waiting until the final year of the fix can halve it), a bigger balance (the saving and the ERC both scale, but fees do not), and how much longer the deal has to run. With only six months left, almost no rate gap justifies the charge, because you could simply wait.

One more wrinkle: many lenders will let you add the ERC to the new loan rather than pay it in cash. That makes the switch feel painless but you then pay interest on the penalty for the rest of the term, which on £4,000 at 4.4% over 23 years is roughly another £2,500. If you do switch, pay the ERC from savings if you can.

How to Avoid or Minimise Early Repayment Charges

• Use the allowance every year. The 10% resets annually (on the deal anniversary or the calendar year, depending on the lender) and unused allowance does not carry over. Spreading a lump sum across two allowance years is often the cheapest route.
• Time lump sums for the SVR window. The gap between one deal ending and the next starting, however short, is ERC-free. Some people deliberately overpay a large sum in that window before locking into the new fix.
• Check the measurement basis before you sign. A deal that charges the ERC on the original loan rather than the current balance, or that measures the allowance against the balance at the start of the year rather than the original loan, can cost you hundreds. It is in the Key Facts Illustration.
• Match the fix length to your plans. If a move, career break or inheritance is likely within five years, a two-year fix or a no-ERC tracker may be cheaper overall than a five-year fix with a 5% penalty.
• Port rather than redeem when you move. Confirm the porting window and affordability requirements before you sell, and ask whether the lender will refund the ERC if you port within its window.
• Stay under the limit with each payment. Some lenders charge the ERC on the whole overpayment, not just the excess, if a single payment breaches the allowance. Keep each payment safely under the line and check how your lender defines it.

For FIRE planning, the ERC is a reason to sequence, not a reason to stop. Fill the penalty-free allowance, direct any surplus into your ISA or pension until the allowance resets, and revisit the decision each time you remortgage. Our guide to how overpayments move your FIRE date shows how much difference a decade of allowance-sized overpayments makes.

Frequently Asked Questions

Work Out Your Own Numbers

Check what an overpayment saves before you decide whether an ERC is worth paying:

• Mortgage Overpayment Calculator — see the interest saved and years cut from any monthly overpayment or lump sum, then compare it with the ERC in your offer
• Principal Payback Calculator — model doubling up on the capital portion of each payment within your penalty-free allowance