You are currently NOT logged in.
Redemption penalties
Most interest rates come with a redemption penalty. This is a penalty that you pay if you redeem your mortgage within a certain period of time. There are two types of redemption penalty, those than ‘overhang’ and those that don’t.
To explain, imagine you have just taken an attractive looking two-year fixed rate. If the redemption penalty is for 3 years then it ‘overhangs’ the introductory rate by one year. This means that when your fixed rate finishes, you will revert back to the lenders SVR and be stuck on it for the third year, unless you pay a penalty.
In comparison a non overhanging redemption penalty would be over a two year period in this example.
Overhanging redemption penalties are very popular with lenders as they can be very lucrative and it allows them to offer what appears to be a jaw droppingly good rate to hook the fish (or customer).
It is highly unlikely that an independent broker would ever recommend a product with an overhanging redemption penalty but beware the nice man in the bank with the glossy advert!
Redemption penalties tend to be calculated as a percentage of the loan amount and are normally between 2% and 5%. If you have taken a longer term fixed rate then the redemption penalty may reduce over the fixed rate period.
There is normally an allowance for overpaying your mortgage, before any redemption penalties will apply and is generally around 10% of the outstanding balance. Anything that you overpay beyond this in any one year will be subject to the redemption penalty.
- Mortgage Service Brochure.pdf (443Kb)
