How is an early repayment charge worked out?
As a percentage of the amount repaid early, at the rate in force on the day it is repaid. On an overpayment it is usually charged only on the part above the penalty-free allowance. When the whole mortgage is repaid inside the charge period, it is commonly charged on the whole amount.
The charge is set out in your mortgage offer, usually as a table of percentages against dates. Three things decide what you pay: the percentage in force on the day, what that percentage is applied to, and how much allowance is left.
The sum for an overpayment
Take a balance of £150,000 at the start of the allowance year, an allowance of 10% of that balance, and a 3% charge in force. The allowance is £15,000. An overpayment of £25,000 is £10,000 above it, so the charge is 3% of £10,000: £300, not 3% of £25,000.
The same overpayment split across two allowance years — £15,000 in one and £10,000 in the next — would carry no charge at all, provided neither year's allowance is exceeded.
The sum for repaying everything
Repaying the whole mortgage while the charge period is still running is commonly charged on the full amount repaid. On the same £150,000 at 3%, that is £4,500. Some offers deduct any unused allowance first. The wording in the early repayment section of the offer is what settles it.
Why the rate changes over time
Charges commonly step down across the deal. A five-year deal might charge 5% in the first year, 4% in the second, and so on down to 1% in the fifth, with nothing after the period ends. The rate that applies is the one in force on the date the money arrives, so the same overpayment a week either side of a step can cost a different amount.
What the charge is not
- Not charged on contractual payments. The monthly payment you are required to make is never an early repayment.
- Not a percentage of the original loan, unless your offer says so. It is applied to the amount being repaid.
- Not permanent. It applies for the period stated in the offer, commonly the length of a fixed or discounted rate.
For your own figures, the early repayment charge calculator does this sum, including the date each band lifts. The allowance has its own guide: what an overpayment allowance is a percentage of.
Questions people ask
Is an early repayment charge worked out on the whole balance?
On an overpayment, usually only the part above the penalty-free allowance is charged. When the mortgage is repaid in full inside the charge period, the charge is commonly worked out on the whole amount repaid. Your offer sets out which applies.
When does an early repayment charge end?
On the date stated in your mortgage offer, which is commonly the end of the fixed or discounted period. Overpayments made after that date carry no early repayment charge unless the offer says otherwise.