early repayment charges
Fixed rate and some discount mortgages come
with early redemption penalties. These can either be a fixed sum
or, more usually, a percentage of the loan and last for the
duration of the deal.
Early redemption penalties can work out very
expensive, if you decide to switch lender shortly after taking out
a special deal. Some lenders charge penalties on a sliding
scale, so that they decrease over the term of the mortgage - for
instance, 5 per cent in year one, 4 per cent in year two and so
on.
For example, if you had a £200,000
mortgage with a 2 per cent penalty, you would have to shell out
£4,000 to move to another lender. So if you are remortgaging you
really need to do your sums carefully to make sure you will be
better off, after paying all the costs associated with
changing mortgage, than you are with your existing lender.
A few lenders charge ‘overhang’ early
repayment charges which means that the penalties can continue after
the end of the special fixed or discounted rate has ended. These
should be avoided at all costs.
For more on this, read
our guide to remortgaging.