Understanding mortgage exit fees and charges

The Cedar Crest Team
Aug 18
5 min read

What are the costs of paying off your mortgage early, and how to minimise or avoid them

Understanding mortgage exit fees and charges

Are you considering switching to a better mortgage deal or paying off your loan early? Be aware that exiting your mortgage isn’t always free. From early repayment charges to final account closure fees, lenders often impose penalties if you leave a mortgage before your term ends. These costs can be significant if you’re unprepared. We outline the main exit fees to anticipate, explain why they are incurred, and offer tips to help you avoid being caught unawares.

WHAT IS AN EARLY REPAYMENT CHARGE AND WHEN DOES IT APPLY?

The Early Repayment Charge (ERC) is one of the most misunderstood and potentially expensive parts of a mortgage agreement. It occurs when you repay your mortgage early, either by switching to a new lender or settling the loan before the end of your initial deal period (usually a fixed, tracker, or discounted rate term). Let’s say you’ve taken out a 5-year fixed mortgage, but after three years you want to remortgage to get a better rate. Unless your deal has ended or your lender permits early switching, you’ll likely face an ERC. This is usually calculated as a percentage of the remaining balance, often starting high (e.g., 5% in year one) and decreasing each year.

For example:

• Year 1: 5% of £200,000 = £10,000

• Year 3: 3% of £180,000 = £5,400

Lenders utilise ERCs to recover losses from providing a discounted rate. They also discourage borrowers from switching to competitors too swiftly.

KEY TIPS TO MANAGE ERCS:

• Check the expiry date of your deal: It is shown on your original offer document or annual statement.

• Utilise your overpayment allowance: Many fixed deals allow you to pay off up to 10% of the balance each year without incurring an ERC. This can minimise your loan amount and lower the total fee.

• Port your mortgage: If you’re moving to a new home, you may be able to transfer your existing mortgage to the new property. This helps you avoid the ERC by remaining with the same lender.

• We can make comparisons: Sometimes, paying an ERC may still make financial sense if your new deal saves enough to cover the penalty. It’s essential to analyse the figures before making that decision.

WHAT IS A MORTGAGE EXIT FEE, AND WHY DO LENDERS CHARGE IT?

Also known as a redemption fee, account closure fee, or deeds release fee, the mortgage exit fee is a fixed charge to cover the administrative costs of formally closing your mortgage. It’s separate from the ERC and must be paid even if you leave your mortgage at the end of the term or after all other penalties have expired. Lenders typically charge between £100 and £300, and the amount is usually agreed upon when you take out the loan. It may cover:

• Final account reconciliation.

• Issuing your redemption statement.

• Notifying the Land Registry of mortgage discharge.

• Returning legal documents (now mostly digital).

These fees used to be more controversial, as some lenders increased them partway through mortgage terms, leading to FCA intervention. Now, most fees are fixed and transparent from day one.

Things to know:

• If you remortgage to a new lender, this fee is added to your final balance.

• You can’t usually avoid it, but you might not pay it if you make a product switch or port your mortgage within the same lender.

• Always double-check your redemption statement, which outlines all final costs and helps avoid surprises before completion.

OTHER COSTS TO CONSIDER WHEN REMORTGAGING

When switching to a new mortgage, the old lender’s exit charges aren’t the only cost. You’ll also need to budget for fees associated with setting up the new mortgage, including:

• Arrangement fees (also called product or booking fees): These can vary greatly, from nothing to over £1,000. Sometimes, paying a slightly higher interest rate with no fee ends up cheaper in the long run than choosing a very low rate with a large upfront fee. Always consider the total cost over the entire fixed period.

• Legal fees: A remortgage typically requires the services of a solicitor to handle legal documentation and land registration. Many lenders offer a free legal service or cashback, but if not, expect to pay around £300 to £500 for standard remortgage legal work.

• Valuation fees: Your new lender might want to assess your home’s value. Many offer free valuations for remortgage cases, but if charged, it’s usually between £150 and £300, depending on the property.

If you want to stay with your current lender, a product transfer usually means you avoid most of these costs, with no legal work, no valuation, and no exit fee.

LESS COMMON BUT ESSENTIAL EXIT COSTS TO WATCH FOR

Beyond ERCs and admin fees, there are a few more obscure costs that can catch borrowers off guard:

• Incentive clawbacks: If your initial mortgage deal included a cash-back, free legal service, or valuation, the lender may revoke those benefits if you exit within a certain period, usually the first 6 to 12 months. These are usually outlined in your offer under ‘special conditions.’

• Interest adjustments: Your redemption amount includes interest calculated up to an assumed completion date. If completion is delayed, you will owe extra interest; if completed early, you may receive a refund. This is not a penalty, just a daily interest adjustment. For example, if your mortgage is £180,000 at 5%, a one-day overrun adds approximately £25 in extra interest.

• Duplicate payments: If your monthly direct debit is taken just before your mortgage is redeemed, it might take a few days for the overpayment to be refunded Always check the final settlement statement with your solicitor.

• Land Registry updates: Once your mortgage is fully repaid, your lender will remove their legal charge on your property. This process is either managed by the lender (included in the exit fee) or by your solicitor. Make sure to obtain confirmation, as this is essential for future property sales or remortgages.

HOW TO MINIMISE EXIT CHARGES AND PLAN SMARTER

Minimising exit costs is about timing, research and communication. Here’s how to reduce what you pay:

• Time your remortgage wisely: Fixed rate deals usually allow you to secure a new agreement 3 to 6 months before your current deal ends. This helps you avoid the ERC and prevents moving onto the lender’s more expensive SVR.

• Utilise your overpayment allowance: If your mortgage permits overpaying up to 10% annually without penalty, take advantage of it, especially as you approach the end of your deal. It can reduce both your balance and your future ERC (which is a percentage of that balance).

• Consider internal product transfers: Switching to a new deal with the same lender can avoid exit fees, legal fees, and valuations. It’s not always the cheapest route, but it’s often the least hassle.

• Port your mortgage if you’re moving home: Many lenders permit you to transfer your deal to a new property. This avoids ERCs and maintains your current rate, which is especially helpful if you’re only partway through a fixed term.

• Explore fee-free or low-fee remortgage deals: Some lenders offer no-fee deals or incentives like cash-back, free valuation, and legal services. Compare the total cost over the fixed term, not just the headline rates.

• Speak to your lender in hardship cases: If you’re facing unavoidable life changes (e.g., redundancy, divorce, relocation), some lenders may offer ERC waivers. It’s not guaranteed, but it’s always worth asking.