Early Redemption Charge

This is a fee charged by the lender should the borrower want to remortgage elsewhere or pay off the mortgage in full before the end of a special rate period (pre-determined at the outset). This is designed to ensure that the borrower stays with the lender for the specified period of time.

There is generally a balance between the rate that is offered to the borrower and the length of time that the borrower will be tied in to that lender with a penalty. If the rate is exceptionally low, the lender will tie the borrower in for longer than the offered rate. For example:

1.49% rate fixed until 1/6/05 but there are redemption penalties until 1/6/09 and the lender’s standard variable rate is 5.65%. If you were to remortgage a £100,000 capital and interest repayment mortgage in the third year, you would be charged a penalty of £6,530.25
3.54% rate fixed for 2 years with redemption penalties only during the fixed rate period. If you were to remortgage a £100,000 capital and interest repayment mortgage during the fixed rate period, you would be charged a penalty of around £2,600. Obviously, there would be no penalty if you remortgaged after the fixed rate had ended.
3.99% rate fixed until 1/7/05 with no redemption penalties whatsoever.

How the lender calculates the penalty does vary from a number of months interest penalty (usually calculated at the lender’s variable rate) to a percentage of the amount of mortgage redeemed.