Your Right to Early Repayment
Under FCA regulations, you have the right to repay a secured loan in full or in part at any time. However, your lender can charge you a fee for doing so if this is set out in your loan agreement. These early repayment charges (ERCs) compensate the lender for the interest income they lose when you pay off the loan ahead of schedule.
Before taking out a secured loan, always check the early repayment terms. Some products have no ERCs at all, while others charge a percentage of the outstanding balance that reduces over time.
Typical Early Repayment Charges
ERCs on secured loans vary by lender and product. Fixed-rate loans typically carry charges during the fixed period — often between 1% and 5% of the balance, decreasing each year. For example, a five-year fix might charge 5% in year one, 4% in year two, and so on down to 1% in year five.
Variable-rate secured loans are more likely to have lower or no ERCs, as the lender is not locked into a fixed rate and faces less financial loss if you repay early. Some products have a flat penalty — for example, three months' interest — while others have no charges at all after an initial period.
Overpayments vs Full Repayment
Many secured loan agreements allow you to make overpayments of up to 10% of the outstanding balance each year without incurring ERCs. This lets you reduce the loan faster and save on interest without triggering penalties.
If you want to clear the loan entirely, the lender will provide a redemption statement showing the exact amount needed to settle, including any ERCs and accrued interest up to the settlement date. Request this in writing so you know the precise figure before committing.
When Early Repayment Makes Sense
Repaying early is most beneficial if you have come into a lump sum — through inheritance, bonus, or property sale — and the interest savings outweigh any ERCs. It also makes sense when remortgaging, as clearing the second charge simplifies your finances and may help you access better first-charge rates.
Calculate the total cost of early repayment, including the ERC, and compare it to the total interest you would pay over the remaining term. If the ERC is less than the interest you would save, early repayment is financially worthwhile.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.