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Views on the removal of ERCs

Journalist: Jake Carter, Mortgage Introducer

ended 11. October 2023

Pure Retirement has reintroduced its Heritage Freedom range, enabling customers to repay up to 20% or 40% of their loan each year without an early repayment charge (ERC).

Do you believe the removal of ERCs could become a trend moving forward?

How much of a bargaining tool is this for lenders?

Has this facility seen a drop off in importance amongst customers in recent times?

9 responses from the Newspage community

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Simon Bridgland
Director at Charwin Private Clients
The ability to pay off part of the loan is a psychological win for clients. Even if they don't actually use it, it will give a lot of comfort to them. The issue with most later-life loans is the hardline stance on ERCs by many products/lenders giving the usual 10% and 10-15 year penalty period. This will help with greater product innovation in the sector, More2Life hitting hard with just a 4 year penalty standing head and shoulders above the competition, Canada Life with 8 years. These are the kind of things clients want to see, it helps to bring later-life loans into the mainstream. So offering greater flexibility to help reduce the debt is a great step forward. If they keep it in place perhaps more lenders will offer it. I've seen more clients enquire about the ability to service the interest, not necessarily in great numbers to that extent, but it does ignite interest.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
I cannot see Early Repayment Charges (ERCs) being removed, especially as we may see rates reduce a bit over the coming 5 years. Lenders have these in place to ensure the deal agreed stays in place for them to earn the expected interest, or if paid off early that profit is recouped by the ERC. It also stops short-term borrowing leaving them out of pocket after the costs of arranging and funding a mortgage. Of course, there will be products without them, often trackers or those with high arrangement fees to offset any potential loss in interest or ERC.
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Mike Staton
Director at Staton Mortgages
In the time of Consumer Duty, this is a great thing for customers, providing the opportunity for more flexibility during these times of hardship. Allowing clients to come off of these high rates once the market stabilises which I predict will be around 2 years. Then we will see 2.5% to 3% fixed rates return whilst clients that tied themselves into long-term 6% & 7% rates will be footing the bill for yet another inept UK government.

The likelihood of all lenders following suit is very slim as they will be waiting to cash in on the windfall they expect with many clients signing up to high fixed rates for 5 or 10 years on an execution only basis
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
Early Repayment Charges (ERCs) are an important component of product pricing, especially on fixed-rate deals, so removing them will invariably drive up the mortgage interest rate; be that on a regular mortgage or a lifetime product. Given that most people won't be in a position to overpay their mortgage, removing ERCs would simply make their mortgage more costly for no real benefit to them. It is, however, a product worth having in most lenders' range, as there will always be someone for whom the ability to overpay large parts of the mortgage is an important part of their needs and they're happy to pay a little extra for the facility. So, whilst I can't see lenders moving wholesale to have all their products ERC-free, or with large overpayment facilities, I think most lenders benefit from having one or two deals in their range that do.
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James Bull
Mortgage Broker at JB Mortgages
Many clients prefer their mortgages to be fixed rate so they know where they stand with monthly payments. The way fixed rates are prices means for many lenders they buy tranches of funding at certain swap rates. ERCs are built into the pricing and profit margins that lenders make, so it would be very difficult to remove them and i very much doubt that consumers would be willing to accept higher interest rates in exchange for no ERCs particularly in the current environment with interest rates rising over the last 2 years.
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Gary Bush
Financial Adviser at MortgageShop.com
I think the relaxation by all lenders to allow account holders to repay penalty-free 20% of their mortgage debt would be a useful move for the industry - however totally removing Early Repayment Charges for all deals, especially fixed, is for the birds. Lenders rely on holding onto clients, to let a free-for-all all occur would seriously affect the competitive nature of the UK mortgage market.
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Peter Stamford
Mortgage Expert at Stamford Home Finance
Let's get real about Early Repayment Charges (ERCs). They're not going anywhere, and here's why: they're the glue that keeps a lender's deal profitable. Sure, we all love the idea of penalty-free payoffs, but ditching ERCs would just hike up your interest rates. It's a balancing act—some homeowners want the freedom to overpay, and they'll pay a premium for it. But for most, a stable monthly payment is the real winner. So, while ERC-free deals might be a niche offering, don't expect them to become the norm.
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Adam Smith
Founder at Alfa Mortgages
It would be pretty cool if lenders got rid of those Early Repayment Charges (ERCs). That way, clients could get a fairer deal in this new age of consumer duty and it would give them more flexibility too. But, you know, we're not sure if this will catch on as a trend or not
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Christian Duncan
Managing Director at Manchester Mortgage Centre
This is a positive step forward from Pure retirement which can only be a benefit to its customers!

In recent months we’ve seen NatWest increase their overpayment with no ERC threshold to 20%. I believe we will see this introduced by more high-street lenders over the coming months.

As mortgage rates continually increase and lenders publish record breaking profits I feel that all mortgage lenders should be more sympathetic to customers looking to reduce their mortgage debt and build financial resilience.