Early repayment charges on mortgages: what UK rules say

An early repayment charge (ERC) is a fee a lender may charge when you repay all or part of your mortgage earlier than agreed, usually during a fixed, tracker or discounted deal period. It compensates the lender for costs linked to the early repayment, such as funding it arranged for the deal.

ERCs are typically expressed as a percentage of the amount repaid, and often step down each year of the deal (for example 5%, 4%, 3%). Once the deal ends and you move to the lender's standard variable rate, there is usually no ERC.

Regulated residential mortgages are supervised by the Financial Conduct Authority under the Financial Services and Markets Act 2000. The detailed rules are in MCOB, which implements the requirements of the EU Mortgage Credit Directive that were retained in UK law.

MCOB 12 deals with charges. It requires that an early repayment charge can be expressed as a cash value and is a reasonable pre-estimate of the costs the lender incurs as a result of the early repayment. Lenders cannot use ERCs simply to make a profit or to penalise the borrower.

Clear information before you sign

Before you take out a mortgage, the lender must give you a European Standard Information Sheet (ESIS) that explains whether early repayment charges apply, how they are calculated and for how long. The same information must appear in the mortgage offer, so you can compare deals and plan overpayments.

Your right to repay early

Under MCOB, borrowers have the right to repay a regulated mortgage early in full or in part. The lender may apply a charge permitted by the contract, but it must give you the information you need to assess the option, including the amount you would pay.

Most UK lenders allow you to overpay a set amount each year without paying an ERC, commonly up to 10% of the outstanding balance, although the exact allowance depends on the product. Overpayments within the allowance reduce your balance without any charge.

Check how your lender measures the allowance: some use the balance at the start of the year, others the balance at the start of the deal, and unused allowance usually does not roll over.

Many mortgages are portable, so you can move house and take your deal with you without an ERC, subject to the lender's approval. Some lenders also waive charges in specific circumstances, so it is worth asking.

Older regulated agreements under the Consumer Credit Act 1974, such as some second-charge loans taken out before 2016, may follow different early settlement rules. Check your contract or ask the lender which rules apply.

Most lenders let you overpay online, by phone or by bank transfer, specifying whether you want to reduce the payment or the term. Some apply a default choice, so confirm which one before paying.

Ask for a statement showing any ERC and your new schedule. If you think a charge is unfair or not a reasonable pre-estimate of costs, complain to the lender in writing and, if unresolved after eight weeks, you can take the complaint to the Financial Ombudsman Service.

Before paying, use the SmashMyRate calculator to estimate how much interest each option saves: within your allowance, every pound of capital repaid early immediately stops generating interest.

Are early repayment charges legal in the UK?

Yes, but for regulated mortgages they must be clearly disclosed and be a reasonable pre-estimate of the lender's costs.

Can I overpay without a charge?

Usually yes, within your product's annual overpayment allowance, often up to 10% of the balance.

Who can I complain to about an unfair charge?

First your lender, then the Financial Ombudsman Service if the complaint is not resolved.