A guide to mortgaging fees and associated penalties
Redemption penalties - What to look for and how to avoid them
Early redemption penalties, also known as early re-payment penalties/fees are becoming an increasingly common feature initiated by mortgage lenders over the past few years. You ask the question – Why are these fees/penalties being imposed by lenders when all I am trying to do is pay them back?
Early repayment fees have become more common because of the increased competition within the UK property market; basically each lender is fighting to retain their market share while at the same time capture business from their competition. This can be seen as a good thing for the average consumer; however there are also some disadvantages to this. Existing customers suffer in the short term whilst their mortgage lender tries to capture new business. This has lead to the phenomenon where the consumer can usually get a better deal by re-mortgaging to a competitor than with their existing mortgage lender, in essence creating a mortgage roundabout.
The result of this is that the mortgage lender needs to retain your business for a number of years to have any chance of making a profit from the transaction made. This is where the early repayment fee comes into play. Lenders now bid to keep your business by imposing heavy penalties if you wish to repay the mortgage within a certain number of years, or as we see it – giving with one hand and taking with the other.
How does this affect me and should I be concerned? ?
It is worthwhile remembering that what from the outset seems the best deal, quite often contains the highest penalty charge. Whilst you will achieve a good saving during the first fixed 1 – 5 years you will then have a period of time when you will be tied to the lenders standard variable rate, which is most likely higher than what is being offered elsewhere. It is sometimes more beneficial in the long term to accept an interest rate that is not quite as attractive as the best in the market but which allows you to re-mortgage again at the end of the initial period. By doing this you can confidently make a saving. At this time you should also be on the lookout for products and deals that will guarantee to offer you another fixed rate at the end of the first fixed rate period. Idealistically what you need to find is a product with no redemption penalties at the end of the first period of the mortgage you should then be safe in assuming that the next fixed rate offer will be, this assumption is based on the fact your lender will want to retain your custom.
What you should remember is that the best rates will almost invariably contain the harshest penalty terms. Whilst you will obtain a good saving during the initial fixed or discounted period you will then have a period of time when you will be tied to the lenders standard variable rate. It is sometimes more beneficial in the long term to accept an interest rate that is not quite as attractive as the best in the market but which allows you to re-mortgage again at the end of the initial period. In this way you can hopefully make a further saving at that point. It is also worth looking out for products that will guarantee to offer you another fixed rate at the end of the first fixed rate period. If you can find a product like this which has no redemption penalties at the end of the initial period then you should be reasonably safe in assuming that the subsequent fixed rate offer will be attractive as otherwise the lender would be in danger of losing your custom.
How can I avoid these penalties altogether ?
Until recently this was quite difficult, however lenders are beginning specialise in offering straightforward variable rate mortgages with none of the catches related with to the more forceful deals. Many of these companies are the new breed of direct telephone style lenders and they try to offer a permanently competitive variable rate with none of the add-ons attached to some of the other products available.