How to Remortgage with Early Repayment Charges

Choosing to remortgage with early repayment charges is a decision many borrowers consider when interest rates change or better deals become available. An early repayment charge (ERC) is a fee that lenders may apply if a mortgage is repaid before the end of an agreed deal period, such as a fixed or discounted rate. Understanding how these charges work is essential when weighing up whether switching mortgages early is financially worthwhile.

In the UK, many mortgage products include ERCs to compensate lenders for the loss of expected interest. However, depending on your circumstances, paying an ERC may still result in long-term savings if a significantly better rate is available. Lenders will also assess affordability, credit profile, and property value when considering a remortgage application.

This guide explains how to remortgage with early repayment charges, how lenders assess applications, and what factors borrowers typically consider before making a decision.

What does remortgage with early repayment charges mean?

Remortgaging with early repayment charges means switching your mortgage before your current deal ends and paying a fee to your existing lender.

Most fixed-rate, tracker, and discounted mortgages include a set period during which ERCs apply. These charges are usually calculated as a percentage of the outstanding balance and can vary depending on how far into the deal you are. For example, a lender might charge 3% in year one, reducing each year.

The purpose of an ERC is to compensate lenders for interest they expected to earn over the agreed period. As a result, borrowers considering an early switch need to account for this cost when comparing new deals.

Mortgage criteria may vary between lenders, and not all products include ERCs. Understanding your current mortgage terms is a key first step before exploring remortgaging options.

When might it make sense to remortgage early?

Remortgaging early may make sense if the savings from a new deal outweigh the cost of the early repayment charge.

For example, if interest rates have dropped significantly since you took out your mortgage, switching to a lower rate could reduce monthly payments or total interest over time. In some cases, these savings can offset the ERC within a relatively short period.

Borrowers may also consider remortgaging early to access additional borrowing, such as for home improvements, or to switch from an interest-only to a repayment mortgage. Lenders will assess affordability based on income, expenditure, and existing financial commitments.

However, the financial benefit depends on factors such as remaining term, loan size, and new product fees. Careful calculation is typically required to determine whether an early move is beneficial.

How much are early repayment charges on a mortgage?

Early repayment charges are typically between 1% and 5% of the outstanding mortgage balance, depending on the lender and product.

Many lenders structure ERCs on a sliding scale. For example, a five-year fixed-rate mortgage might charge 5% in the first year, reducing gradually to 1% in the final year. The exact structure is outlined in the mortgage offer.

For larger mortgages, even a small percentage can result in a substantial fee. For instance, a 3% charge on a £200,000 balance would amount to £6,000. This is why understanding the cost is essential before proceeding.

Some mortgages may also include additional exit fees or administrative charges. These costs should be considered alongside valuation fees, legal costs, and any arrangement fees on the new mortgage.

How do lenders assess a remortgage application?

Lenders assess remortgage applications based on affordability, credit history, property value, and loan-to-value ratio.

Affordability checks typically involve reviewing income, employment status, and regular expenses. Lenders may also apply stress testing to ensure borrowers can afford repayments if interest rates rise in the future.

Credit history is another important factor. A strong credit profile may improve access to competitive rates, while recent missed payments or high levels of unsecured debt could limit options.

The property’s value and the resulting loan-to-value (LTV) ratio can influence available deals. Lower LTV ratios often provide access to more favourable interest rates, which may impact whether paying an ERC is worthwhile.

What risks should you consider before remortgaging early?

The main risk of remortgaging early is that the cost of the ERC and fees may outweigh any savings from a new deal.

Interest rate changes can be unpredictable. A borrower might switch to a new deal expecting long-term savings, only for rates to fall further or for the financial benefit to be smaller than anticipated.

There is also the risk of extending the mortgage term. While this may reduce monthly payments, it can increase the total amount of interest paid over time.

For buy-to-let properties, lenders may apply additional criteria such as rental yield requirements and stress testing. These factors can influence whether a remortgage is approved and how beneficial it is financially.

Example scenario: remortgaging during a fixed-rate period

A borrower considering remortgaging during a fixed-rate period will typically compare the cost of the ERC against potential savings.

For example, a homeowner with a £250,000 mortgage at a 5% fixed rate may face a 2% ERC, equating to £5,000. If a new deal offers a rate of 3.5%, the borrower would need to calculate whether the reduced monthly payments offset this upfront cost.

Lenders would assess affordability based on current income and outgoings, and the property would likely be revalued to determine the new LTV. If the property has increased in value, this could improve access to lower rates.

This type of scenario highlights the importance of comparing total costs over time rather than focusing solely on headline interest rates.

Are there alternatives to remortgaging early?

Alternatives to remortgaging early include waiting until the deal ends or exploring product transfers with your current lender.

A product transfer involves switching to a new deal with the same lender, often without full affordability checks or legal work. Some lenders allow this without triggering ERCs, depending on the timing.

Borrowers may also consider making overpayments within allowed limits, which can reduce the balance and future interest without incurring penalties. Many mortgages allow overpayments of up to 10% per year.

Each option has different implications for cost, flexibility, and eligibility. Mortgage criteria and product features vary widely, so understanding the terms of your existing mortgage is essential.

FAQ: Remortgaging with early repayment charges

Can you remortgage before a fixed term ends?

Yes, it is usually possible to remortgage before a fixed term ends, but early repayment charges may apply depending on the mortgage terms.

Is it ever worth paying an early repayment charge?

It may be worth paying an ERC if the savings from a new mortgage deal exceed the cost of the charge over time.

Do all mortgages have early repayment charges?

No, not all mortgages include ERCs. Some variable rate or tracker products may have no early exit fees, but this varies by lender.

How can you find out your early repayment charge?

Your ERC details are usually outlined in your mortgage offer or annual statement. Your lender can also confirm the exact amount.

Does remortgaging affect your credit score?

Remortgaging involves a credit check, which may have a small temporary impact, but responsible borrowing can support your credit profile over time.

This guide provides general information only. Personalised mortgage advice should always come from a regulated mortgage adviser authorised by the Financial Conduct Authority.