Thousands of mortgage borrowers in the UK still face a difficult decision when selecting a loan, over the pros and cons of redemption penalties. While lenders have largely listened and reacted to public opinion regarding ‘extended tie-in’ penalty clauses on products, the majority of mortgage offerings in the UK still have some penalties for full or partial redemption during the initial special rate period.
This means borrowers are faced with a difficult choice. They can take advantage of exceptional interest rates in the knowledge that if they exit the scheme before the lender’s charge end date, they will face a punitive penalty. Alternatively, they can choose a scheme with full flexibility and no penalties. However, in almost all cases this will result in a higher initial interest rate.
Borrowers tend to be fairly blazÃ© about two to five-year deals ‘ no-one commits to a two-year product without being certain that their circumstances are perfectly stable and the mortgage will at least run its course.
However, in reality the statistics say otherwise. One in three marriages ends in divorce, and many more relationships end in separation. Job security is diminishing and employees are changing jobs on a more frequent basis. Furthermore, the average number of years a person will live in their current house remains in single figures.
All the statistics point to the fact that people’s circumstances do change and so yes, people do want to review their mortgage options within the early years. Penalties typically range from 2% to 5% of the outstanding mortgage balance, which is a pretty hefty amount. On the flip side, products with penalty clauses are generally found at only 0.3% to 0.5% below their penalty-free equivalents.
If there is a significant difference in interest rate, and a client is confident of their ability to fulfil a certain time commitment, then there are powerful arguments for recommending a scheme with early redemption penalties. However, in uncertain times I would rather have the option of remortgaging onto a better deal, than make do with an uncompetitive loan no longer suited to my requirements.
Nick Parkhouse is a consultant at Savills Private Finance