How to Calculate Mortgage Overpayment Penalties (ERC) Yourself

What is an early repayment charge (ERC)?

An early repayment charge (ERC) is a fee that mortgage lenders may charge if you repay part or all of your mortgage before the end of a deal period, such as a fixed-rate term. It compensates the lender for the interest they lose when you pay off the loan early.

Most UK lenders allow you to overpay a certain amount each year without triggering an ERC. This is commonly around 10% of your outstanding mortgage balance annually. If you overpay more than this allowance, the ERC is usually applied only to the amount that exceeds the allowance, not the entire loan.

• ERC is a penalty for repaying a mortgage early or overpaying above the annual allowance.
• It is calculated on the excess overpayment amount, not the whole loan, when you exceed the allowance.

Sources: MoneySuperMarket, HSBC UK

When do ERCs apply to overpayments?

ERCs typically apply during a fixed-rate or discount period. If you make an overpayment that exceeds your annual penalty-free allowance (often 10% of the balance), the lender may charge an ERC on the excess.

Some lenders may not charge an ERC for regular overpayments, but may charge one if you repay the entire mortgage during the fixed-rate period. For example, first direct allows unlimited overpayments but states that an ERC could apply if you repay the whole mortgage during the fixed-rate period.

• ERCs are most common during fixed-rate or discount periods.
• Overpayments above the annual allowance can trigger an ERC on the excess.
• Some lenders only charge an ERC when the entire mortgage is repaid early.

Sources: MoneySuperMarket, HSBC UK, first direct

The formula for calculating an ERC

The ERC calculation is straightforward when your lender sets a percentage rate. The formula is:

ERC = (excess overpayment amount) × (ERC percentage).

• Identify your lender's annual overpayment allowance (commonly 10% of balance).
• Subtract the allowance from your total overpayment to find the excess.
• Multiply the excess by your lender's ERC percentage.

Sources: MoneySuperMarket

Worked example: calculating an ERC on a £10,000 excess

Let's walk through a scenario. Suppose you have a mortgage balance of £200,000 and your lender allows 10% overpayment per year. You decide to make a lump sum overpayment of £30,000. Your penalty-free allowance is £20,000 (10% of £200,000). The excess overpayment is £30,000 - £20,000 = £10,000.

If your lender's ERC rate is 3%, the charge would be £10,000 × 3% = £300. This means your total overpayment of £30,000 would cost you £300 in penalties, in addition to the mortgage repayment.

• Example inputs: balance = £200,000, annual allowance = 10%, overpayment = £30,000, ERC rate = 3%.
• Allowance = £20,000, excess = £10,000, ERC = £300.

Sources: MoneySuperMarket

How to find your lender's ERC terms

The exact ERC percentage and how it applies vary by lender and product. Most UK lenders allow a penalty-free annual overpayment of around 10% of the outstanding balance, and ERC percentages typically range from 1% to 5% of the remaining loan, decreasing each year into the deal.

You can find your lender's ERC terms in your mortgage offer, annual statements, or by checking the lender's website. Some lenders provide overpayment calculators that estimate savings but note that they do not include ERCs. For example, HSBC's calculator does not account for early repayment charges, and Yorkshire Building Society's calculator excludes ERCs.

• Review your mortgage offer or terms and conditions.
• Contact your lender or check their official website.
• Be aware that many overpayment calculators do not include ERCs in their estimates.

Sources: MoneySuperMarket, HSBC UK, Yorkshire Building Society

Ways to reduce or avoid ERCs

The most straightforward way to avoid an ERC is to stay within your annual overpayment allowance. For most UK lenders, this is around 10% of your outstanding balance per year.

If you want to make a larger overpayment, consider timing it for when your fixed-rate deal ends, as ERCs typically no longer apply after the deal period. Some lenders may be willing to waive or reduce ERCs in certain circumstances, but there is no universal guarantee; you would need to discuss this with your lender.

Some lenders, such as first direct, do not charge an ERC for regular overpayments, but may charge one if you repay the entire mortgage during the fixed-rate period. Always check your specific mortgage terms.

• Stay within your annual allowance (typically 10%).
• Wait until your fixed-rate period ends to make larger repayments.
• Check if your lender charges ERCs on full repayments but not on partial overpayments.

Sources: MoneySuperMarket, HSBC UK, first direct