Is It Worth Paying an ERC to Remortgage?

When Might It Be Worth Paying an ERC?

Paying an early repayment charge to remortgage can make financial sense when the savings from a lower interest rate are large enough to outweigh the cost of the penalty. This is most common when interest rates have fallen significantly since you took out your current deal.

It can also be worthwhile if you're on a variable or tracker rate that has increased substantially and you want to lock in a fixed rate for security. The monthly savings from a lower rate, multiplied over the remaining deal period and beyond, may comfortably exceed the ERC.

Another scenario is when you need to release equity for home improvements or debt consolidation. If the financial benefit of accessing that equity outweighs the ERC, it could be a sensible move, though you should always take professional advice.

How to Calculate the Break-Even Point

The break-even point is the moment when your accumulated savings from the new rate equal the cost of the ERC. To find it, divide the total cost of the ERC by the monthly saving you'd make on the new deal.

For example, if your ERC is £4,000 and the new mortgage would save you £200 per month, it would take 20 months to break even. If your new deal lasts for five years (60 months), you'd be in profit for 40 of those months, saving a further £8,000 after recovering the ERC cost.

Don't forget to include the other costs of remortgaging in your calculation, such as arrangement fees, valuation costs and legal fees. These add to the total you need to recover before you genuinely start saving money.

When You Should Wait Instead

If your ERC is high and your current deal is close to ending, it almost always makes more sense to wait. Paying a large penalty with only a few months of savings to recoup it is rarely worthwhile.

You should also be cautious if the rate difference between your current deal and the best available rate is small. A saving of £50 per month, for example, would take a long time to offset a £3,000 ERC. In these cases, the risk usually outweighs the reward.

Remember that mortgage rates can change. If you pay an ERC to lock in what looks like a great rate today, there's always a chance that rates could drop further. Waiting until your deal ends gives you more flexibility and avoids locking in an unnecessary cost.

Getting Professional Advice

Deciding whether to pay an ERC is one of the more complex mortgage decisions you can face. A qualified mortgage broker can model the exact costs and savings for your situation, taking into account your outstanding balance, the ERC percentage, current rates and all associated fees.

Many brokers offer this advice for free, earning their income from commission paid by the lender. This means you can get a detailed cost comparison without paying for the privilege, which makes it well worth seeking professional guidance before making such a significant financial decision.

If you're considering paying an ERC to remortgage for reasons other than rate savings, such as releasing equity or consolidating debt, it's especially important to get advice. A broker can help you understand the long-term implications and ensure the move makes financial sense overall.