7 Reasons to Understand Early Repayment Charges Before You Take a Bridging Loan
If you are considering a bridging loan, you need to understand early repayment charges (ERCs) before you sign. Lenders sell smooth-case scenarios in glossy brochures: quick completion, flexible exit, low headline rates. What they often bury in the small print is the cost of repaying early. This list will break down the real reasons ERCs exist, show the maths with real pound examples, and give you tactical steps to reduce or avoid these charges.
You will learn five core reasons ERCs are applied, each explained with numeric examples so you can model the cost on your deal. The last section gives a 30-day action plan - a checklist that includes specific figures to ask lenders for, scripts to use, and practical workarounds. Read this if you will borrow £50,000, £150,000 or £500,000 - the mechanics are the same and the numbers matter.
Reason #1: Lenders budget for interest income - they need to be compensated for lost cash
Lenders set a bridging loan expecting to earn a certain stream of interest. If you repay early they lose that expected income. That gap is the primary driver of ERCs. For example, suppose you take a £200,000 bridging loan at 0.75% per month for a 12-month term. Expected monthly interest is £1,500 and total interest for the year is £18,000. If you pay the loan back after three months, the lender misses out on roughly £13,500 of expected interest. The ERC is a way to recoup part of that loss.
ERCs are rarely simply the difference in interest; they are set to make the lender whole in the face of early exit assumptions, administrative disruption, and the time value of money. A common ERC structure is a sliding scale: 3% of the loan in year 1, 2% in year 2, 1% in year 3. On a £200,000 loan that is £6,000, £4,000 and £2,000 respectively. Sometimes lenders charge a monthly penalty equivalent to one month’s interest for each month remaining - that would be harsher on short-term exits.
Scenario Loan Rate Expected 12-month interest ERC in year 1 (3%) Example A £200,000 0.75%/month £18,000 £6,000 Example B £100,000 1.00%/month £12,000 £3,000Think of ERCs like an insurance premium a lender buys for their profit forecast. If you rip the policy up early, someone still wants to be paid for the risk they underwrote.
Reason #2: Arrangement fees and upfront costs are amortised - repaying early breaks that amortisation
Bridging lenders charge arrangement fees and legal fees up front. Those fees often cover due diligence, property valuations, solicitor liaison and the original underwriting effort. Lenders amortise those fees across the assumed lifetime of the loan. Early repayment interrupts that amortisation so the lender wants the unrecouped portion back.
Consider a typical deal: £150,000 loan, 2% arrangement fee (£3,000), plus £500 valuation and solicitor costs totalling £3,500 at drawdown. The lender counts on earning back that £3,500 across the 12 months. If you redeem after two months, the lender has only had two months to recover the cost. A simple pro rata approach would mean you owe 10/12 of the £3,500, i.e. £2,917, on top of any ERC. Some lenders add a fixed admin charge too.
Practically, when you compare offers, ask lenders to itemise the treatment of arrangement fees on early exit. Some lenders refund part of the fee on a pro rata basis or waive the remainder after a defined period. Others keep fees regardless. Get that number in writing; it can be the difference between a £3,000 and a £6,000 early exit cost.
Reason #3: Funding and hedging costs - lenders borrow and hedge, and those contracts have penalties
Lenders are not banks with unlimited liquidity. Many specialist bridging lenders raise their own funding through wholesale lines, securitised pools or private investors. Those funding sources charge costs and sometimes impose penalties if the borrower repays early. The lender may be stuck paying a break fee to its funder, which it passes on to you as an ERC.
Example: a lender funds a £300,000 bridging loan by drawing on a fund that charges a fixed return. The fund may have been hedged with a swap contract priced for a 12-month hold. If the loan redeems at month four the swap needs to be closed out and likely incurs a cost of, say, £8,000. The lender will seek to recover that amount. That is why ERCs are sometimes quoted as a specific funder break cost rather than a simple percentage of loan value.
Hedging adds another layer. If a lender hedged interest rates expecting to hold the loan, sudden repayment can create a loss on the hedge. Some lenders bury warranty language that allows them to pass those losses to the borrower. This is explainable economically, but it is worth negotiating. Ask for the funding source and whether the ERC is a capped fee understanding interest rates for bridging loans or a pass-through of actual break costs. A capped fee gives you certainty; a pass-through can be open-ended.
Reason #4: Loans are often sold or packaged - early redemption disrupts the secondary market and investor returns
Many bridging loans are intended for short resale to investors or for packaging into a larger pool. Investors buy loans with a certain yield and maturity profile. Early redemption reduces investor yield and complicates cash flow matching. To protect investor returns, the original lender includes ERCs.
Say a lender originates a £250,000 bridging loan and plans to sell it to an investor for a 10% return. The investor budgets for receiving interest over, say, eight months. If you repay after two months the investor's expected yield falls. The loan originator either needs to buy the loan back at a discount or levy an ERC to restore the investor’s return. That restoration shows up as a charge to you.
This mechanism is why some lenders advertise "no ERC" but route the loan through a special programme that has minimum holding periods enforced by investor agreements. Read investor clauses. If a lender says "no ERC", check whether they instead roll an implicit cost into a higher arrangement fee or a higher monthly rate. Transport the deal into pure numbers: which is cheaper, a 3% upfront fee with no ERC or a 2% fee and a 3% ERC if repaid early?
Reason #5: ERCs deter abuse and short-term arbitrage - they stop repeat gaming of low introductory rates
Some borrowers would borrow for a week, repay, then re-borrow to pocket temporary rate quirks. Lenders saw that behaviour and added ERCs to deter it. ERCs protect the system from being gamed by traders or by operators who flip assets rapidly just to capture short-term quirks.
Imagine a property flipper who repeatedly takes a £100,000 bridging loan at 0.5% per month to fund quick refurbishments expected to take four weeks each. If the flipper could borrow and repay cost-free multiple times, an arbitrage appears. Lenders add ERCs to keep those strategies expensive. A 2% ERC on each early repayment turns a tempting short-term cycle into a losing proposition: on a £100,000 loan a 2% ERC is £2,000, which wipes out a lot of a typical profit on a quick flip.
This deterrent role has a public-policy feel: it keeps bridging lenders viable for genuine short-term borrowers - house buyers waiting for mortgage completion or businesses bridging cashflow - rather than for professional traders seeking fee-free rotation. When you plan your exit, model potential ERCs as a cost of doing business and add them to your profit-and-loss forecast. If you cannot absorb a £3,000 ERC on a £150,000 loan without killing your margin, rework the plan.
Your 30-Day Action Plan: Reduce or Avoid Bridging Loan Early Repayment Charges
This is a practical, numbered 30-day plan focused on numbers. Follow it and you will either minimise ERC risk or know the exact cost before you commit.
Day 1-3: Gather the facts
Ask each lender for a written early repayment breakdown: explicit ERC percentage, fee treatment, funder break costs, and any administrative or legal fees on exit. Example request: "Please confirm ERC as a percentage and sterling on a £150,000 loan repaid at month 3, and state whether arrangement fees are refundable pro rata." Put a target of three offers.
Day 4-8: Run the numbers
Make a simple spreadsheet. Columns: Loan value, monthly rate, arrangement fee, expected term, ERC % year 1, ERC £. Example: £150,000 at 0.9%/month = £1,350/month. 3% ERC = £4,500. Compare total cost if repaid at month 3: interest £4,050 + ERC £4,500 + pro rata unrecouped fee £2,500 = £11,050. That figure samples the real exit cost.
Day 9-14: Negotiate with evidence
Armed with numbers, ask lenders to reduce or cap ERCs. Use leverage from competing offers. Script: "I have an offer that caps ERC at 1% within year 1. To proceed with you I need either a similar cap or a refund of arrangement fees pro rata after three months." Push for caps in pounds, not vague clauses.
Day 15-21: Build exit certainty
Secure your exit route. If refinancing to a mortgage, get a mortgage offer in principle and a named completion date. If selling the property, secure the estate agent and a marketing timeline. The more certain your exit, the easier to argue for lower ERCs. Example: a lender may waive ERC if you provide a mortgage offer within 60 days.
Day 22-27: Prepare contingency cash
Set aside funds equal to two months’ interest plus a conservative ERC buffer. For a £200,000 loan at 0.75%/month that is interest £3,000/month so two months = £6,000. Add a 3% ERC buffer = £6,000. Total reserve = £12,000. That gives you flexibility to redeem without scrambling for cash.
Day 28-30: Formalise and document
Get any negotiated ERC terms in the loan offer letter, not in a separate email. If you agreed a cap of 1% in year 1, make sure the offer states "ERC capped at 1% of outstanding balance if repaid within 12 months" and that arrangement fees will be refunded pro rata. Signed letters beat memory.
Final tactical tips: if the ERC structure is opaque, walk away. If a lender insists on open-ended pass-through of funding break costs, demand a cap. If you are a repeat borrower, ask for loyalty terms - a lender that wants a long-term relationship will be more flexible on ERCs.
Think of ERCs as the price of certainty for the lender. Your job is to make that price predictable or to avoid paying it by timing, negotiation and proper exit planning. Put numbers in every conversation - lenders respond to money, not marketing phrases. If an ERC on a £150,000 loan comes back as £4,500, treat that as a real business cost and include it in your profit and cashflow models before you sign.