What should I know about early repayment charges when selling my house with a mortgage?
An early repayment charge (ERC) is a fee your mortgage lender may apply if you repay all or part of your mortgage before the agreed date, including when you sell your house. Check your mortgage offer or ask the lender for an up-to-date redemption statement, as the charge can affect the amount needed to complete the sale.
An early repayment charge can reduce the money you receive from a sale, but it is not automatically payable in every transaction. Whether you owe one depends on your mortgage product, the date the loan is redeemed and the terms in your mortgage offer. Selling the property does not, by itself, remove the charge.
When an early repayment charge may apply
ERCs are most commonly attached to fixed-rate, discounted-rate or other special mortgage products for a defined period. Repaying the mortgage during that period, including through the sale of the property, may trigger the fee. Some mortgages do not include an ERC, while others allow certain overpayments without a charge. Your lender’s terms determine which position applies.
The charge may be calculated by reference to the amount being repaid or may follow a schedule set out in the mortgage paperwork. It can sometimes reduce as the product approaches the end of its incentive period. Do not assume that waiting until the end of a fixed or discounted period will be beneficial without checking the relevant dates, because the sale’s completion date is usually important.
Check the total redemption figure
Ask your lender for an up-to-date redemption statement before agreeing the financial details of the sale. This should show the amount required to repay the mortgage on a specified date and identify any ERC included in the calculation. The figure may also include accrued interest, an administration or exit fee, arrears, or other amounts permitted under the mortgage agreement.
A redemption statement is date-specific. If completion takes place later than the date used by the lender, the amount may change. Your conveyancer should obtain or confirm the appropriate figure close to completion and use it to calculate whether the sale proceeds are sufficient to discharge the mortgage and associated costs.
Compare the charge with the available alternatives
- Wait until the charge period ends: If the property can remain on the market and the mortgage terms make this practical, delaying redemption may avoid the ERC. Consider the additional mortgage interest, ownership costs and market risk before making that decision.
- Use an overpayment allowance: Some lenders permit a stated amount of capital to be repaid during a product period without an ERC. The allowance may not cover the whole mortgage and may have its own conditions.
- Port the mortgage: If you are buying another property, your mortgage may be portable. This is not automatic; the lender normally assesses the new borrowing and property, and the timing must comply with its rules. Any additional borrowing may be placed on different terms.
- Redeem and pay the charge: If selling is necessary and no suitable alternative applies, the ERC may simply form part of the cost of completing the sale.
Porting a mortgage is different from transferring the existing charge to the buyer. A buyer does not normally take over your mortgage, so the outstanding loan must generally be repaid as part of completion unless the lender and legal structure provide otherwise.
How the charge affects completion
Your conveyancer uses the redemption figure when preparing the completion statement. The sale proceeds are applied first to the costs and liabilities shown in that statement, including the mortgage redemption amount. The lender’s charge over the property must normally be discharged so that the buyer can receive the agreed title.
If the sale price is not enough to cover the mortgage balance, ERC and other completion costs, there is a shortfall. The lender may require the difference to be paid or an agreed arrangement to be in place before it will release its charge. This is separate from the question of whether the ERC itself is valid under the mortgage contract. Discuss any projected shortfall with the lender and conveyancer as soon as it becomes apparent.
Practical steps before accepting an offer
- Read the mortgage offer, annual statement and product terms for the ERC period, calculation method and overpayment conditions.
- Ask the lender for a redemption statement based on an estimated completion date.
- Request a written breakdown of any separate interest, exit, administration or arrears charges.
- Give the figures to your conveyancer so the net proceeds can be calculated accurately.
- Check whether porting or waiting until the ERC period ends is realistic, particularly if you are buying another home.
- Allow for the possibility that the redemption figure will change if the completion date changes.
A cash buyer may make it easier to coordinate a sale around a particular completion date, but a cash purchase does not cancel an ERC or alter your mortgage contract. The charge should therefore be identified before accepting an offer and included in the calculation of the amount you expect to retain from the sale. If the wording of the mortgage is unclear, obtain an explanation from the lender or regulated mortgage adviser rather than relying on a general assumption about early repayment charges.
An early repayment charge is generally assessed when the mortgage is actually redeemed, rather than when the property is marketed or an offer is accepted. In a sale, this usually makes the completion date the important date: if completion occurs before the relevant mortgage product period ends, the lender may include the charge; if completion is later, the calculation may differ.
Ask the lender or conveyancer which date their redemption calculation uses and whether the quoted figure remains valid if completion moves. This is particularly important where there is a delay between exchange and completion, because the mortgage balance, interest and any applicable charge may need to be recalculated.