Many mortgage plans come with early repayment or redemption charges. These can occur when you decide to repay all or part of the original loan. Charges normally come as one of the following;

1. A certain number of months interest ( e.g. 6 months)
2. A % of the total sum already repaid (e.g. if you've already paid £10k of a £100k loan)
3. A % of the initial mortgage amount (the amount first borrowed)
4. a % of the current mortgage balance (the present amount still owed)

• But why might you have to repay a mortgage early?

• Perhaps you lose a well paying job, maybe a marriage ends or for ill health reasons

• Of course, there is also a chance that your financial situation could improve via an investment windfall or a relative leaving you money

The ability to repay part or all of a mortgage is a critical component to a mortgage's Terms & Conditions. Even if you believe that it is unlikely you still want to make sure that you know exactly what kinds of charges are involved. In fact, many mortgage advisors state that flexibility in this matter is one of the most important components when comparing different mortgages.

To sum up, do your homework into this matter. No mortgage is the same, and realise the financial services industry is often slightly sneaky in that what on the surface is a great mortgage, can come with strings attached especially when it comes to early redemption penalties.

How To Compare Early Redemption Fees

All mortgages are different and this can make comparing them a problem. But if you ask the following four questions you'll soon get a good idea of the advantages and disadvantages from one deal to the next. It is also very important to always get written confirmation of any advice or answers that you have especially when it comes to explaining complex financial matters.

1. Are there any early redemption penalties?
2. If so, what time period do the penalties last for?
3. What is the cost of any penalties broken down year by year. Year 1, year 2 etc. In a situation like this you may be fobbed of with a formula as an answer, don't accept this, insist on the actual amount in Pounds
4. Are there any over-payment charges? For example, your mortgage payments may be £500 a month but what happens if you occasionally want to add in another £500. Can this be done without occurring a charge, and if not what are the associated costs?

What Kinds of Mortgages Carry Early Redemption Charges?

Most mortgages carry some sort of early repayment feature apart from Flexible mortgages, discussed below. The ones to really watch out for are the 'special offer' mortgages because they often try and claw back cash if you want or need to make extra repayments.

The good news is that many of the penalties only last for the period of the deal. For example if a mortgage fixes the interest rate for a 5 year period then early repayment charges will only last 5 years. Some mortgages even go as far as to reduce the penalties year by year, so if you decide to repay in year 3 then this is at a lower amount than if you do so in year 2 etc. This is why it's hard to compare different mortgages because of the myriad of the small print.

What Are Extended Redemption Penalties?

Extended redemption penalties are something to be aware of. As already discussed most repayment penalties last as long as the initial deal, e.g. if the interest rate is capped at 5% for 5 years the penalties also last for 5 years. But with extended penalties they may last another 3 years on top of the original 5, making a total of 8 years. For example;

• A Fixed Rate mortgage is taken out where the rate is fixed at 6% for 5 years

• After 5 years the interest rate starts to float

• The early repayment schedule is not scrapped and the penalty clauses continue for another 3 years

• In this type of scenario if you want to repay or change to another mortgage provider it's possible that all the previous savings could be wiped out

• But why would you want to change your mortgage provider after 5 years?

• Perhaps interest rates have moved significantly lower, or a financial institution is offering you far better terms

• As ever, it pays to keep you options open so be wary of mortgages with extended penalties

Early Repayment & Flexible Mortgages

Flexible mortgages are good news for those wanting to repay all or part of their mortgage early. There are two main advantages. Firstly very small or non-existent charges, and secondly the ability to drawdown any lump sum payments that have been made. For example;

• You have a £100,000 mortgage and receive a £30,000 legacy from a relative (after tax), you use all of this money to reduce the mortgage balance

• But in a year's time £20,000 is needed to build an extension to your property

• You have the option to drawdown the £20k from the flexible mortgage

Of course, the phrase Flexible mortgage does not mean that all of these styles of mortgages operate the same way when it comes to early repayment. True most of them don't have any penalties (or negligible) but the small print is always different. You're still advised to do some homework into comparing a number of different mortgages in order to see which one is likely to suit you and your financial needs the best.