What are Redemption Penalties?

The redemption penalty clause is often hidden away in the small print of the mortgage deal. Pay off your mortgage early, and it may come back to haunt you.

The consumer lobby claims that redemption penalties are nothing more than shackles on property-buyers freedom to get the best mortgage value. But the financial thinking behind imposing them is clear cut: the twin pressures of competition and borrower demand have forced lenders to offer products at interest rates which bring in low revenues per loan. In order to make a realistic profit, they need borrowers to remain with them for as long as possible. The function of the early repayment penalty is therefore to persuade the borrower to stay put, or face a substantial charge for changing lender.

Why not scrap redemption penalties?

To abolish these penalties altogether, would narrow a borrower’s choice, with less lenders willing to offer low interest rate loans.

Over-hanging penalty clause

Some redemption penalty clauses persist even when the interest on the loan has reverted from the discounted rate to the standard variable rate. This is known as an “over-hanging penalty clause”. Due to growing pressure from consumers, the number of mortgage products offered with an ‘over-hanging’ penalty clause appear to be declining.

Always read the small print!