How early repayment charges are calculated: the methods

This page is the arithmetic behind early repayment charges (ERCs): the two methods that appear most often in UK residential offers, each worked on the labelled EXAMPLE house, plus a stepped schedule year by year. Whether paying a charge is worth it is a timing question, covered on early repayment charges; the short definition is the ERC glossary entry.

The FCA's consumer guidance describes an ERC as normally a percentage of the remaining balance that usually falls as the deal nears its end. The other common shape is a set number of months of interest at the product rate. Your offer and Key Facts Illustration state the method, the percentage or months, the balance it applies to and the date it ends. Cashback clawback is a separate condition and not part of these formulae.

Fix the ERC figure first, then compare rates over a set horizon. The ERC estimator turns a rule into a sterling estimate; the true cost calculator adds fees, cashback and the rate difference.

Method 1: percentage of balance

The ERC is a stated percentage of the outstanding balance, or of the amount repaid early. Many deals step down by year and reach zero when the deal ends. Some apply the percentage only to the amount above an annual overpayment allowance, so the hard part is confirming which figure the percentage multiplies: full balance, redeemed amount, or the excess.

EXAMPLE 1: 2% of £185,000

• Outstanding balance: £185,000
• EXAMPLE ERC method: 2% of outstanding balance on full redemption
• Months left on the current deal in the shared site case: 4

Maths: £185,000 × 2% = £185,000 × 0.02 = £3,700.

If this EXAMPLE charge applied and you redeemed the whole loan, £3,700 would sit in the cost stack before product, legal and valuation fees. Over a two-year horizon that alone can outweigh a modest monthly saving on a slightly lower rate, which is why the date the charge ends matters as much as the percentage.

Method 2: months of interest

The ERC is a number of months' interest at the product rate (or another rate the offer names), often on the amount repaid early. A simple full-redemption illustration is balance × annual rate ÷ 12 × months. Offers may use a daily rate, apply it only to the redeemed slice, or cap the result.

EXAMPLE 2: three months’ interest at EXAMPLE 4.19% on £185,000

• Outstanding balance: £185,000; EXAMPLE product rate: 4.19%
• EXAMPLE ERC rule: 3 months’ interest on the outstanding balance (an illustration, not a claim about any lender)

Maths (simple monthly interest × months):

• One month’s interest ≈ £185,000 × (4.19 ÷ 100) ÷ 12 = £185,000 × 0.0419 ÷ 12 = £645.96 (rounded to the nearest penny)
• Three months’ interest ≈ £645.96 × 3 = £1,937.88

Equivalently: £185,000 × 4.19% × (3 ÷ 12) = £185,000 × 0.0419 × 0.25 = £1,937.88.

Here the months-of-interest charge (£1,937.88) is lower than 2% of the balance (£3,700) on the same £185,000. That is not a reason to prefer one method: a higher rate, more months or a stepped percentage in a different year could reverse it.

EXAMPLE 3: a stepped 5/4/3/2/1% schedule

Many percentage schedules step down by year. This EXAMPLE is a separate illustration, not the shared case’s 2% row: imagine the same £185,000 at EXAMPLE 4.19% on a five-year fix with a 22-year repayment term, and an ERC of 5% in year one, then 4%, 3%, 2% and 1%. The percentage applies to the balance on the day you redeem, and that balance falls as you make payments. The table shows full redemption on the first day of each year.

Maths: ERC = balance on the redemption date × that year’s percentage. The balances come from the standard repayment schedule: a monthly payment of about £1,074 at 4.19% over 22 years, with each month’s interest at 4.19% ÷ 12 on the balance then outstanding.

Applying each percentage to the original £185,000 instead would give £7,400, £5,550, £3,700 and £1,850 for years two to five, overstating the charge by roughly £209 to £328 a year here. The balance also keeps falling inside each year, so the charge drifts down month by month until the next step.

Stepped schedules: which rate to enter in the ERC estimator

The ERC estimator takes one percentage, not a whole schedule. Its inputs are: Outstanding balance; ERC method (None, % of balance, or N months’ interest); Percentage (0 to 10%) or Number of months (0 to 36); Current annual rate (asked for only with the months-of-interest method); and Amount redeeming early (leave 0 for the full balance). For a stepped schedule, type the percentage for the ERC year your redemption date falls in — the current-year rate — not the year-one rate and not an average of the schedule.

• Find the step dates in the offer. Some schedules step on each anniversary of the product start, others on fixed calendar dates. The offer says which.
• Work out which year of the schedule your planned completion date falls in. That year’s percentage is the one to type.
• Type the balance expected on that date — ideally from a redemption statement — not the original loan amount.
• Leave Amount redeeming early at 0 for a full remortgage. For a part-repayment where the offer charges only the excess over an allowance, type just the excess.

EXAMPLE: entering year two of the 5/4/3/2/1% schedule

Using the table above, redeeming at the start of year two on a balance of about £179,766:

• Current-year EXAMPLE rate, 4%: about £7,191 — the right input.
• Year-one EXAMPLE rate typed by mistake, 5%: about £8,988, overstating by about £1,797.
• Schedule average typed, EXAMPLE 3%: about £5,393, understating by about £1,798.

EXAMPLE: completing either side of a step date

Completing one month before the year-three step, on about £174,772 at EXAMPLE 4%, gives about £6,991. Completing at the start of year three, on about £174,309 at EXAMPLE 3%, gives about £5,229. On these EXAMPLE figures that one month is worth about £1,762 — far more than the roughly £8 a month of interest that an EXAMPLE 4.14% rate saves against EXAMPLE 4.19% on this balance. Lenders define step dates differently, so confirm the exact date in writing before you plan completion around it.

EXAMPLE: part-repayment above an allowance (shared 2% row)

On the shared case — £185,000 and an EXAMPLE 2% charge — imagine an EXAMPLE 10% annual overpayment allowance (£18,500). A £25,000 lump sum goes £6,500 over it. If the offer charges only the excess, enter balance £185,000, % of balance, 2, and Amount redeeming early £6,500: the estimator returns £130. Leave the amount at 0 for full redemption and it returns £3,700.

With the months-of-interest method, the estimator takes the Current annual rate ÷ 12 × the full balance × the number of months, then scales the result to the amount redeemed. Three months at EXAMPLE 4.19% on £185,000 returns £1,937.88, matching Example 2. An offer that uses a daily rate or a different balance will give a slightly different figure.

Paying the ERC by borrowing more

Adding the £3,700 EXAMPLE ERC to the £185,000 balance makes a £188,700 loan. Against the illustrative £250,000 value, loan to value moves from 74% to about 75.5% — just over a typical 75% band — and the payment rises by about £21 a month at EXAMPLE 4.14% over 22 years (about £298 more interest over 24 months). The higher band may also carry a higher rate, and whether a lender will lend for this is its decision. Check the band in the LTV and equity calculator.

What else to read in the offer

• the deal end date and the date any ERC schedule falls to zero
• whether partial overpayments have an annual free allowance
• whether the percentage or months apply to full redemption, partial redemption, or both
• any separate exit or admin fee on redemption, and cashback clawback periods
• portability rules if you move home during the deal

A redemption statement from your lender nearer the time gives the live figure. Estimators help you plan; the statement and offer settle what is owed.

The rule behind the methods

FCA Handbook MCOB 12.3 (checked 2 November 2026) requires an ERC to be expressible as a cash value and to be a reasonable pre-estimate of the lender’s costs, rules out the old “Rule of 78”, and requires the maximum ERC to be shown in the illustration. Lenders still choose their own method. Consumer context: FCA on mortgages and rate changes and MoneyHelper on remortgaging, both checked 2 November 2026.

Every rate, schedule and allowance here is an EXAMPLE, not a quote, not personalised advice and not an FCA-regulated recommendation. Your offer and ESIS set the real ERC. If you want regulated advice on whether to wait, transfer or remortgage, an FCA-authorised adviser can give it.