Early Repayment Charges (ERCs), Redemption Penalties, Lock-Ins, Tie-Ins and Overhangs
An early repayment charge (ERC), also known as an early redemption penalty, is a tactic used by mortgage lenders to ‘lock’ or ‘tie’ borrowers into their product. It is basically a cash penalty levied at you for deciding to end the mortgage relationship prematurely and taking your business elsewhere.
As it’s in the lender’s interest to keep you as a customer for as long as possible, the threat of an ERC, which can run into thousands of pounds, will hopefully be enough to dissuade you from going elsewhere.
ERCs are also a way for mortgage companies to reclaim anything they may have initially stumped-up to win your business (e.g. a cashback or generous introductory discount) – money they would have eventually got back had you remained a customer for longer.
ERCs last for a fixed period, and once this expires you’re free to move your mortgage to a better deal without penalty. For example, if you have a two-year fixed rate mortgage, you’re likely to have a two-year ERC, after which time you can switch mortgage without cost. But switch after only one year and you’ll have to pay a charge for exiting the deal one year early.
Beware Extended Tie-Ins! (The Dreaded ‘Overhang’)
Extended Tie-Ins penalise the customer for moving a mortgage even after the discount period ends.
For example, a two-year fixed rate mortgage could have a four-year ERC. This means that you’ll be charged for transferring your mortgage during the first four years, including during the two year period after the fixed rate ends when you’ll likely be paying the lender’s SVR.
The good news is that there are mortgages out there with no ERC at all, so if your most important tick-box is the ability to shop around for a new mortgage at any time, you may want to keep your eyes peeled for one of these.
Next - Part 19: Interest Calculation
