Is it worth paying an ERC to refinance?

2 min read

Break-even testSaving vs charge

Count all costsNew fees too

Rate alone misleadsERC can wipe the gain

Sometimes waitCharge may taper

The break-even question

Refinancing onto a cheaper loan can save money — but leaving your current loan early may trigger an early repayment charge, and setting up the new one may carry an arrangement fee. The switch only pays if the interest you save over the remaining term is greater than the charge to leave plus the cost to set up the new deal. A lower headline rate is not enough on its own.

Running the numbers

Get three figures: the settlement figure on your current loan including the ERC, the total repayable on the new loan for the same remaining term, and any set-up fees on the new deal. If the current loan's remaining total repayable exceeds the new loan's total plus the ERC and fees, refinancing saves money. If not, staying put is cheaper. The true cost calculator makes this comparison concrete.

Timing the switch

Many early repayment charges taper — they are larger early in the term and shrink as you approach the end. If your ERC is close to falling to zero, waiting a few months before refinancing can turn a marginal switch into a clear win. Equally, if rates are rising, moving sooner to lock in may be worth a charge. Weigh the ERC's trajectory against where borrowing costs are heading.

See refinancing an existing loan and refinancing onto better terms. When the maths works, apply for the new facility.

Frequently asked questions

How do I work out the break-even on refinancing?

Compare the total remaining cost of your current loan against the total cost of the new one plus the early repayment charge and any new set-up fees. If the new all-in cost is lower, refinancing saves money; if not, stay. Use total repayable figures, not headline rates, because fees and the ERC can easily reverse an apparent rate advantage.

Can I ask the new lender to cover the ERC?

Sometimes a lender keen to win your business will absorb some set-up costs, and occasionally factor the situation into the deal, but they rarely pay another lender's early repayment charge directly. More often the ERC is simply a cost you weigh in the break-even. It is always worth asking what the new lender will do to make the switch worthwhile.