Mortgage Penalties.

by Mark Johnston

Mortgage Penalties.

It is easy for borrowers to think that in the current climate switching to a mortgage deal with a better rate will save them lots of money, but things are never that simple.

Early redemption penalties have become an increasingly common feature of most mortgages over recent years.

There is frequently a trade off between getting a competitive interest rate on a fixed mortgage deal and making yourself vulnerable to early redemption charges. Thus meaning that redemption penalties can be the sting in the tail of an otherwise attractive mortgage offer.

Therefore borrowers should bear in mind that the best rates will almost invariably come with the harshest penalty terms.

An early redemption charge or redemption penalty is a fee that a borrower may face if they pay off all or even part of their mortgage earlier than originally agreed.

These penalties are designed to compensate a lender for the interest that they would have been paid had the mortgage run its full term.

With the mortgage market so competitive at the moment, with every lender fighting to retain their market shares and also capture business from their competitors, many products are now sold as a ‘loss leader’, which means that the lender will not make a profit on the deal that is until the borrower has held the product for a number of years.

Therefore, lenders compensate for this by charging extremely puntive fees to borrowers who try and switch their mortgage before the end of the deal, thus making sure that the borrower holds on to the product until they have made a profit.

Redemption penalties can be a fixed sum of money, though it is more usual to see a proportion of the loan used as a deterrent to cashing in early. A ‘fine’ of up to six months worth of additional interest is most commonly charged.

The duration of the penalty period does however vary from mortgage to mortgage and lender to lender and there are still of course some deals that come with no early redemption charges whatsoever!

It does appear to many borrowers that figuring out the penalty on a fixed rate mortgage can be likened to solving a calculus equation. This may be due to the fact that historically lenders have used cryptic penalty language in order to disguise just how expensive it is.

The Financial Service Authority (FSA) has previously criticised banks and building societies for targeting their customers with huge exit fees through unclear contractual terms that are buried in the small print of their mortgage agreements.

So in light of this lenders and mortgage advisers must now bring early repayment charges to the attention of all consumers.

However , some consumer lobbyists claim that redemption penalties are nothing more than “cruel shackles” on house buyers freedom of movement.

Although all this said some industry experts feel that if redemption penalties were abolished totally it could severely narrow borrowers choice with in the mortgage market.

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