What Is An Early Redemption Penalty or Charge?

Jason Bailey

Written by Jason Bailey on February 5, 2019

Updated June 7, 2019

Couple looking at loan agreement

Early Repayment Penalty also refers to Early Repayment Charge (ERC) and indicates a fee you might be required by a lender in case you paid off your mortgage or loan prior to the credit facility’s scheduled term.

A redemption penalty is usually equal to one or more months’ interest. Generally speaking, early redemption penalty is commonly charged as a specific percentage of a mortgage or loan. It’s definitely a great idea but could cost you dearly if you aren’t careful. It can also be quite confusing particularly for first-time loan and mortgage shoppers due to the different terms lenders use.

A number of different terms are usually used to refer to early redemption penalties such as a financial penalty, early redemption charge, redemption charge or early redemption fee.

Higher charge for early repayment

Anytime you decide to repay your loan before the expiry of the credit agreement period the charge will be higher. This is due to interest being a considerable part of the loan repayment for early reimbursement of the loan. Most credit facilities’ early repayment have clearly indicated higher costs for doing so.

Ensure all the charges are clear from the beginning prior to completing the loan application. In case you’re sure of early loan repayment, make sure to add the cost of ERC as you compare the various loans from different loan providers.

What you should expect to pay

At times it isn’t easy to know what the total amount will be when it comes to early repayment. Counting your early redemption penalty can be hard in some instances. The rule of the thumb is never to accept any loan or mortgage facility before you understand redemption penalty cost in its entirety.

Early redemption penalty can be ascertained by an amount already set or by a percentage of a property loan yet to be paid. The mortgage agreement you signed into should outline this clearly.

What about mortgages without redemption penalties?

Of course some mortgages in the market today are provided without an early redemption penalty. The flexibility is usually clear right from the beginning which should help your decision-making process and selecting a mortgage that works for you. The same case applies for other types of loans as well. Don’t forget that moving existing loans into debt consolidation won’t do away with the early redemption penalty you agreed to.

While a good number of mortgages do provide such flexibility with the best thing to do is to ask about redemption penalties right from the start. Make it mandatory to check for mortgages and loans without early repayment charges before accepting the terms. It’s almost impossible to convince a lender to change it once the facility has been released.

Comparison is key

The most important thing in purchasing a loan is not to make your decision fast or fail to shop around. Comparing loans and mortgages doesn’t just help you find the most serviceable with great terms. It can help you compare the early redemption penalty among the different lenders and see how it’s calculated. Also, it helps you to shop efficiently for credit facilities without a redemption penalty.

Take loan comparison seriously. It helps to highlight the various loans without an early redemption penalty or other hidden charges. If you don’t, you might actually end up with a more expensive loan even without early redemption penalty associated with it. Don’t forget to take into account other factors such as monthly repayments and APR (Annual Percentage Rate).

Other charges payable

Early redemption penalty can translate into thousands of pounds and thus very important to take into account. However, other charges could also be associated with a loan or mortgage even with early redemption charges. An exit fee is one such charge you need to be aware of. Exit fees are usually charged for having closed a mortgage account by a lender.

Closing a mortgage can be informed by diverse reasons, such as switching to a better provider or re-mortgaging via another agreement with the same provider. Even completing your mortgage payments could attract an exit fee.

Pay attention to all charges and fees, not just early redemption penalty and exit fees. Others to check out include admin exit fee, release deeds fee, mortgage completion fees among others.

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