Early Redemption Fees - The Basics
Depending on the type of mortgage involved, early redemption charges may be payable if a mortgage loan is paid off near the beginning of its term. Early redemption fees are often charged in the early years of many fixed rate, capped rate or cash back mortgages, when they are repaid early. Mortgage providers contend that these fees help them to reduce their exposure to risk caused by possible changes in interest rates and other issues.
Borrowers should also be aware that many financial institutions charge a discharge fee (sometimes known as a redemption fee, just to confuse matters!) when a mortgage loan is repaid at any time before the end of the mortgage term. Therefore, it is possible, under certain circumstances, that a lender may levy both a discharge fee and an early redemption fee.
Calculation of Early Redemption Fees
Early redemption fees are usually calculated in one of four different ways:
a percentage of the original mortgage loan value;
a percentage of the balance still owing on the mortgage;
a percentage of the amount already repaid;
a number of months' interest.
Often the level of the early redemption fee levied by the mortgage provider will reduce over time. For example, on a five-year fixed rate mortgage, , the early redemption charge might be six months' interest for the first year of the mortgage, five months' interest for the second year, four months' interest for the third year, three months' interest for the fourth year and two months' interest for the fifth year.
What are Early Redemption Penalties
Early redemption fees are often referred to as early redemption penalties. Strictly speaking, they are not penalties, because the mortgage lender has to provide details of any early redemption fees in the key financial information and the mortgage offer given to a prospective borrower. As is so often the case, it always pays to read and consider all the details when looking at a mortgage offer. The old saying, 'act in haste, repent at leisure' is particularly appropriate when it comes to choosing a mortgage that includes early redemption fees in its terms and conditions.
Early redemption fees are a common feature in the early years of many fixed rate and capped rate mortgages;
early redemption fees may be calculated in a number of different ways;
early redemption fees are usually at their highest when a mortgage is paid off near the beginning of its term.