How to Avoid Early Repayment Penalties on Your Loan: Strategies to Pay Off Your Mortgage Early

Did you know that paying off your mortgage ahead of schedule can save you thousands of dollars in interest? However, before you celebrate your financial savvy, it's important to consider if any prepayment penalties may eat into your savings. Understanding how to avoid these penalties can help you make informed decisions about your loan repayment strategy.

Key Takeaways:

  • Avoiding early repayment penalties can help you save money on your mortgage.
  • Review your loan documents to understand if there are any prepayment penalties.
  • Consider making extra payments towards your loan's principal to reduce the overall interest paid.
  • Consult with a financial advisor to determine the best approach for your situation.
  • Explore options such as refinancing your mortgage into a shorter loan term to avoid prepayment penalties.
Check your car loan repayments
Use our FREE calculator

Understanding Prepayment Penalties

A prepayment penalty is a fee imposed by lenders on borrowers who repay their loans ahead of schedule, such as a mortgage rate or mortgage early repayment charge. This fee can apply to a range of loans, including current mortgages or home loans, investment property loans, and personal loans. Familiarising yourself with the terms of your prepayment penalty, like paying off the mortgage, paying back, or paying it off early, is crucial, as it can impact your ability to settle your loan early.

Prepayment penalties come in different forms, such as a percentage of the remaining loan balance or a specified number of months' worth of interest payments, like monthly payments on your mortgage. These penalties are typically detailed in loan agreements, including the mortgage balance, and can vary based on the loan type and the lender, whether you pay on your mortgage or pay off a mortgage. Generally, prepayment penalties diminish over the initial years of the loan term, which includes prepayment penalty examples and clauses.

Prepayment Penalties Examples

Get your lowest rate from 30+ lenders

1. Percentage-Based Prepayment Penalty: If your mortgage is $200,000 and the prepayment penalty is 2%, you would need to pay $4,000 if you opt to pay off the loan early, which includes a prepayment penalty clause.

2. Time-Based Prepayment Penalty: Suppose your loan agreement specifies a penalty equivalent to six months' interest payments; in that case, you'll have to calculate the interest for that period and pay the corresponding amount, including the prepayment penalty.

3. Combination Penalties: Some lenders may employ a combination of factors, such as a fixed percentage and months' interest payments, to determine the prepayment penalty, which is a charge that you'll pay if you pay on your loan early.

Understanding the "prepayment penalty" for your specific loan is crucial as it directly impacts the amount you'll pay if you choose to pay off your mortgage early. It's essential to review your loan documentation carefully and discuss any questions or concerns about prepayment penalties with your mortgage lender to avoid paying the early repayment charge (ERC).

Keep in mind that lenders typically charge when you pay off your loan early, and some may impose a soft prepayment penalty. While paying off your mortgage early can help save on interest and reduce mortgage debt, be aware of the charges associated with early repayment and ensure they align with your financial goals and plans.

The Cost of Prepayment Penalties

Before deciding to pay off your mortgage ahead of schedule, it's crucial to grasp the potential expenses tied to prepayment penalties. These fees are levied by lenders when you repay your loan early. The exact charges and calculation methods for prepayment penalties can vary based on the lender and the type of mortgage you have.

If you opt to settle your loan within the initial year, prepayment penalties typically commence at around 2% of the remaining balance. It's important to note, however, that these penalties usually decrease each subsequent year until they phase out entirely.

Some lenders determine prepayment penalties by calculating a certain number of months of interest. For instance, if your mortgage carries a 3% prepayment penalty and your remaining balance is $250,000, paying off the loan early would incur a $7,500 charge.

Keep in mind that different lenders adhere to distinct policies and terms regarding prepayment penalties. Therefore, it's essential to thoroughly review your mortgage agreement and engage with your lender to fully comprehend the specific costs and penalties associated with your loan.

How to Avoid Prepayment Penalties

To avoid prepayment penalties on your mortgage or loan, there are several strategies you can employ:

  1. Choose lenders without prepayment penalties: Before committing to a mortgage or loan, research different lenders and loan products. Look for options that do not charge prepayment penalties. This will give you the flexibility to pay off your loan early without incurring additional fees.
  2. Timing is key: Prepayment penalties are often time-based, meaning they phase out over a certain period. If you anticipate paying off or refinancing your loan, it might be worth waiting until the prepayment penalty period has passed. This way, you can avoid the fees altogether.
  3. Make allowable extra payments: Many lenders allow borrowers to make extra payments towards their principal without triggering prepayment penalties. Check with your lender to determine the limits and guidelines for making additional payments. By staying within the allowable limits, you can pay off your loan faster without incurring penalties.
  4. Consider mortgage porting: If you're planning to move to a new property, some lenders offer the option to transfer your existing mortgage to the new property. This can help you avoid prepayment penalties as you're not technically paying off the loan early. Speak to your lender to understand the eligibility criteria and potential benefits of porting your mortgage.
  5. Explore mortgage refinancing: Refinancing your mortgage can provide an opportunity to pay off your current loan and secure a new loan without prepayment penalties. By refinancing, you can take advantage of lower interest rates or adjust the terms of your loan to align with your financial goals. Consult with a mortgage broker or financial advisor to assess whether refinancing is a feasible option for you.

By implementing these strategies, you can avoid prepayment penalties and effectively pay off your mortgage or loan on your terms.


In conclusion, when considering paying off your mortgage early, it's crucial to take into account the potential impact of prepayment penalties, including clauses related to prepayment penalties. Being well-informed about the terms and costs associated with these penalties is key to making sound decisions regarding your loan repayment strategy.

Implementing strategies to avoid prepayment penalties, such as making biweekly mortgage payments or exploring refinancing options, can help you achieve your goal of debt elimination without facing additional fees like hard prepayment penalties. It's important to note that lenders may charge when you pay off your loan early, so it's wise to avoid paying the early repayment charge if possible.

Consulting with a financial advisor can provide valuable guidance tailored to your specific financial circumstances, whether you have a fixed-rate mortgage or are considering overpaying your mortgage. Remember that prepayment penalties vary and can affect your ability to pay off all or part of your loan early, particularly within the first years of a 30-year mortgage.

While paying off your mortgage ahead of schedule can lead to savings on interest and contribute to financial freedom, it's essential to carefully assess the potential impact of prepayment penalty costs, including the soft prepay penalty, before making any decisions. With a well-thought-out plan and an understanding of the terms, you can navigate the process successfully and achieve your financial goals.

How Driva Can Help You Finance Your Next Vehicle Purchase

Looking to finance your next vehicle purchase? Driva can help you find the best mortgage deal to fit your needs. With Driva, you can compare rates from over 30 lenders, ensuring you get the best rate possible for your new mortgage loan. Driva offers transparent rates with no hidden fees, allowing you to see exactly what you will be paying. By entering some personalised information, you can find the best mortgage product for you. When considering a new mortgage deal, it's important to understand how early repayment charges work and how to avoid paying unnecessary penalty fees. By carefully managing the term of your mortgage and staying informed about the type of prepayment penalty your lender charges, you can pay off your outstanding mortgage without incurring hefty penalties.

Frequently Asked Questions

What is an early repayment charge on a mortgage?

An early repayment charge (ERC) is a fee that is charged by a lender if you pay off your mortgage earlier than the agreed-upon loan term. This charge is typically designed to compensate the lender for the interest payments they will no longer receive due to early repayment.

How can I avoid early repayment charges on my mortgage?

You can avoid early repayment charges by reviewing your mortgage contract to understand the terms and conditions regarding prepayment penalties. Additionally, you can opt for a mortgage without such charges or consider the best way to pay off your mortgage early without triggering the penalties.

Why do lenders charge prepayment penalties?

Lenders charge prepayment penalties to protect their bottom line by ensuring they receive the expected interest payments over the agreed loan term. These charges act as a deterrent to borrowers who may pay off their mortgage early.

Can you provide an example of a prepayment penalty?

Sure, a common example of a prepayment penalty is when a borrower decides to pay off their mortgage in full before the end of the loan term and is charged a percentage of the remaining balance as a penalty.

How do prepayment penalties work?

Prepayment penalties work by stipulating a specific amount or percentage of the outstanding balance that the borrower must pay if they choose to repay the loan early. This amount is typically outlined in the mortgage contract.

Is it worth paying an early repayment charge to pay off my mortgage early?

Whether it is worth paying an early repayment charge to pay off your mortgage early depends on your financial situation. You should weigh the cost of the penalty against the interest savings you would gain by paying off the loan early.

What is the best way to avoid paying the early repayment charge?

The best way to avoid paying the early repayment charge is to carefully review your mortgage terms before signing, opt for a mortgage without such penalties, or find ways to pay off your mortgage early without triggering the charge.

Should I include a prepayment penalty clause in my mortgage agreement?

It depends on your financial situation and goals. Consulting with a financial advisor can help you make an informed decision.

What are the costs associated with prepayment penalties?

Prepayment penalty costs vary depending on factors like the loan amount, remaining balance, and the lender's policies.

What should I know about my mortgage contract?

It's important to carefully review your mortgage contract to understand terms like prepayment penalties, repayment options, and any potential fees.

What is an extra payment for a mortgage?

An extra payment is an additional payment made towards your mortgage, which can help reduce the principal amount and interest paid over time.

Philana Kwan

Philana Kwan is the marketing coordinator at Driva she has a demonstrated history in customer service excellence and is knowledgeable in all things car and finance related. When she’s not working Philana enjoys learning new things and keeping up with the latest trends in marketing and technology.

Find your best car loan in 60 secondsUse our free loan matching tool to assess your options.Start Now
Recent Posts

We search far and wide for your best rate, so you don’t have to!

Start Now
Find your perfect loan match in 60 seconds
Get your FREE quote