Mortgage redemption is the endpoint of involvement with a mortgage for most borrowers: with repayment mortgages, it occurs when the loan that has been taken out is paid off in full. Normally this is when all scheduled mortgage payments have been made, but like with many loans there often exists the capacity for the borrower to make a lump sum payment to redeem the mortgage before the preset payment schedule is complete. There can be many reasons to do this, such as wishing to own the property completely, or to pay off a mortgage loan to allow remortgaging at a much more competitive rate.
Mortgage Redemption Fees
However, despite there being a right in law to do this, mortgage redemption payments are almost always subject to a fee imposed by mortgage lenders. Mortgage redemption penalties exist because a lender generally requires the borrower to follow a set plan of monthly repayments comprising of the capital of the loan borrowed with the addition of any interest incurred. As an early repayment will therefore counter this plan, a mortgage redemption fee is required to cover the cost of any maintenance and general administration of the mortgage during its term. Even if this amount would not appear to be worthy of mortgage fees, increasing competition between mortgage lenders means they will attempt to retain business at the expense of their customers. In other words, borrowers will face a mortgage redemption penalty to deter them from paying off their mortgage early in order to take up another property loan elsewhere, even if that product has relatively low mortgage fees.
Mortgage Redemption Figure
If a borrower decides to proceed with redeeming their mortgage before the payment schedule is ended, the process usually begins with acquiring a redemption statement requested from their lender. These statements will give a mortgage redemption figure, advising the borrower how much is currently owed on their mortgage, in addition to any fees that need paying. If they have a mortgage where the loan amount remains outstanding after the end of the mortgage term, such as is the case with interest only mortgages, the lender will require them to get a valuation on whatever investment they intend to use to subsequently pay off the loan to ensure it will cover this sum.
Mortgage Redemption Penalty
It is advisable to take some time to consider whether making a mortgage redemption payment is worth the additional costs involved. Such mortgage redemption fees can range from one month’s interest payment, right up to 12 month’s interest in extreme cases. This penalty is non-refundable and is added to the mortgage amount, which could make the borrower’s final payment jump considerably.
Avoiding a Mortgage Redemption Penalty
There are now, however, a number of mortgage lenders specialising in straightforward mortgage products without these additional costs involved. Certain variable rate mortgages now allow borrowers to avoid these mortgage redemption penalties altogether, though these mortgage providers and the loans they offer are still fairly scarce in the market.
Mortgage Redemption Calculators
To find out whether making an early redemption payment will be a viable option if moving to another mortgage product is desired, considering the penalties involved, a mortgage redemption calculator is a useful tool. If the borrower is considering remortgaging, this type of mortgage calculator works out how much interest they would need to be paying on your new mortgage to make the potential early repayment costs worthwhile.