How to Reclaim an Unfair Mortgage Early Repayment Charge
An early repayment charge (ERC) is the fee a lender applies if you repay or overpay your mortgage beyond the allowed limit during a fixed or discounted period. ERCs are legitimate, but they are regulated: a lender cannot simply charge whatever it likes. The charge must be a reasonable pre-estimate of the costs the lender actually incurs when you repay early. If your ERC looks disproportionate, was not clearly disclosed before you took the mortgage, was applied when it should not have been, or was calculated using a method the regulator says is inappropriate, you can complain and ask for a refund. You send the complaint yourself, it is free, and you keep 100% of any money returned.
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Early repayment charges on regulated mortgages are governed by the FCA's MCOB rules. Under MCOB 12.3, a firm must ensure that any early repayment charge is able to be expressed as a cash amount and is a reasonable pre-estimate of the costs the lender incurs as a result of the customer repaying early. The FCA's guidance states that the 'Rule of 78' is not an appropriate method because it overstates the lender's cost. The ERC must also have been clearly disclosed in your pre-sale documents, including your illustration and mortgage offer. If you believe the charge was not a reasonable pre-estimate, was wrongly applied, or was not properly disclosed, you can complain to the lender. If it rejects you or does not respond within 8 weeks, you can take the complaint to the Financial Ombudsman Service for free, and it will expect the lender to show how the charge was calculated.
Step by step
- 1Dig out your mortgage offer, illustration (Key Facts Illustration or ESIS), and the redemption statement showing the ERC charged. Check how the charge was described before you took the mortgage and how much you were actually charged.
- 2Identify your ground for complaint: the charge was not a reasonable pre-estimate of the lender's costs, it was not clearly disclosed before you committed, it was applied when no ERC was due (for example after the fixed period ended), or it was calculated using an inappropriate method.
- 3Write to your lender setting out why you believe the ERC was unfair or wrongly applied, and ask it to refund the charge. Ask the lender to show exactly how it calculated the charge and to evidence that it was a reasonable pre-estimate of its costs. Keep a dated copy.
- 4If the lender refuses, cannot justify the calculation, or fails to issue a final response within 8 weeks, refer the complaint to the Financial Ombudsman Service within six months of the final response. The FOS can order a refund of any part of the charge that was unfair.
What they'll say, and your comeback
“The early repayment charge was in your contract, so it is valid.”
Comeback, Being in the contract is not enough on its own. Under MCOB 12.3 the charge must be a reasonable pre-estimate of the lender's costs. Ask the lender to show its calculation. If it cannot evidence that the figure was a reasonable pre-estimate, the Financial Ombudsman can require a refund of the excess.
“Our charge is a standard percentage of the balance, which is industry practice.”
Comeback, A flat percentage is only acceptable if it still reflects a reasonable pre-estimate of cost. If the percentage produces a charge far larger than the lender's genuine cost, it may fail the MCOB test. The lender should be able to justify the figure, not just point to common practice.
“You repaid early, so the charge automatically applies.”
Comeback, Only if an ERC was genuinely due. Check the dates: charges should not apply once the tie-in period has ended, and overpayments within your allowance should not trigger a charge. If it was applied outside those terms, you are entitled to the money back.
FAQ
How do I know if my early repayment charge was too high?
Ask the lender to explain how it calculated the charge. A fair ERC reflects a reasonable pre-estimate of the lender's costs of you repaying early, not a round percentage chosen for convenience. If the charge looks disproportionate, or the lender cannot evidence the calculation, you have grounds to challenge it.
Do I need a claims company to reclaim an ERC?
No. Complaining to your lender and, if needed, escalating to the Financial Ombudsman Service is completely free. A claims management company would take a cut of any refund for work you can do yourself in a couple of letters, so you keep more by doing it directly.
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