Glossary - Early Redemption Penalty

Early Redemption Penalty is a fee charged if switching mortgage lenders.
An early redemption charge is associated with fixed rate mortgages, capped mortgages or even cash back mortgages. The mortgage lender agrees to a finance package that has benefits for the consumer but the consumer in return must keep the mortgage for a certain length of time which is normally set in the agreement. If the borrower would like to pay off their mortgage or re-mortgage before the end of that agreed term, then they may be charged a fee as they would be breaking the agreement. Not all UK mortgage lenders charge early redemption fees so to be informed you should ask before you sign any paperwork.

Example: Fixed Rate Mortgages
With a fixed rate mortgage the interest rate is set at a particular rate for a set period of time, this set priod of time is determined by the lender and is the lenders side of the agreement. The borrower has to agree to pay the mortgage for this set time. If the borrower should wish to change to a cheaper mortgage deal or want to remortgage before the end of the agreed period, then the borrower may be charged a fee to be released by the lender as the agreement would have been broken.

Useful Tip
If moving to a different mortgage lender or re-mortgaging compare the savings and the costs make sure you include any early redemption fees. Re-mortgaging could save you money straight away but if costs are involved it may take time to recoup the initial layout, however it may still be worth doing as over the year there could be substantial savings.

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