An Early Repayment Charge (ERC) is also known within the industry as a redemption penalty, or redemption charge. It is a common condition of many fixed rate, discounted and capped rate mortgage products that an early repayment charge will be applied in the event of redeeming the mortgage before the tie-in period finishes. This tie-in period will of course differ from one mortgage product to another – generally speaking, the tie in period will last for as long as your fixed, discounted or capped rate.

Another charge that you may have heard of is an overhang penalty – This is not very common in todays market however it can be applied even after your fixed rate period has come to an end. The best time to find out about these different charges is at the start of any mortgage or loan application. In respect to mortgages, all fees and charges are highlighted in the Key Facts Illustration (KFI) which will be issued to you before the start of the application.

Many fixed term unsecured and second charge loans will apply an early repayment charge throughout the duration of the loan term. Again the charge applied will differ from one lender to another and will usually be calculated as one months interest, or a number of months worth of interest.

The early repayment charge will often have a large bearing on a borrowers selection of mortgage. If an individual is looking to move house within any given tie-in period, it is important to ensure before embarking on the mortgage application that the product is portable, or the early repayment charge applicable is kept to a minimum. In every case it is important to do your research and enquire at the start of any mortgage or loan application about any early repayment charges applicable.

If you are considering paying off a mortgage or loan before the end of its term or tie in period, you must be aware at the outset that this action could prove extremely costly. Many mortgage lenders will calculate their early repayment charges on a percentage of the outstanding loan amount. Many sub-prime mortgage lenders may calculate this as high as 6% of the outstanding balance!