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What Is a Redemption Fee on a Mortgage?

Written by, Marija Petkova

Updated May, 11, 2022

If you’re planning to switch to a new mortgage deal, you might be subject to a redemption fee.

But what is a redemption fee on a mortgage and how does it work?

Here’s everything you need to know.

What is a Mortgage Redemption Fee?

A redemption fee for a mortgage, also known as an exit fee or discharge fee, is an administrative fee that borrowers might be required to pay when they switch lenders or if they repay/end their loan earlier than the original final payment date.

 Lenders charge a redemption fee to make up for the money they’ll lose in interest repayments. The fee is usually one or two months’ worth of loan interest.

Sometimes lenders don’t include a redemption fee in the deal, but in cases of long-term fixed rate mortgages, they can charge you a fee if you decided to pay out the loan too early.

There are cases when the lender charges an exit fee but also offers some benefits to the borrowers, like a cheaper rate. 

In certain situations, paying a redemption penalty for a mortgage (typically from £50 to £300) can end up being more affordable if you find a better deal with another lender.

How do Lenders Calculate Mortgage Redemption Figures?

Borrowers will have to ask the lender to obtain a settlement figure for ending the loan with them early. If you want to get a rough idea of how much that would be and if it’s an affordable option, here’s what lenders usually take into consideration when calculating a mortgage redemption figure.

  • The amount owed on your existing loan.
  • Unpaid interest charges.
  • Administrative expenses associated with the conclusion of the mortgage
  • Pre-set penalties for paying off the loan earlier than intended.

The Mortgage Redemption Process Explained

The process is different for borrowers that are paying off their loan earlier than the final payment date and those that are switching to a new lender. 

Here’s how to go about it and what to expect.

  1. Communicate Directly With Your Lender

If you want to initiate the ending process, you’ll have to reach out to your lender to request a redemption statement if you’ve decided to re-mortgage or if you’re moving house (closing balance). The redemption statement features the remaining amount of your loan and all fees associated with it.

Lenders usually contact the borrower when the deal is coming to an end to notify them that they’re being placed on the SVR.

  1. Get in Touch With Your Solicitor

Whether you’re switching to a new mortgage or paying off your current one, you’ll need a solicitor to make sure you’re doing everything right in preparing the mortgage documents, moving the property title, and dealing with the payments.

  1. Make a New Mortgage Application

If you decide to switch lenders, you’ll have to go through every step that you did when obtaining the first one. This includes starting an application procedure and gathering paperwork to prove you can pay out the loan.

If you’re moving you might want to consider a mortgage in principle (MIP), which would assist you in having offers approved, before applying for a new mortgage.

  1. Money and Legal Papers Should Be Transferred

The final step includes taking and moving cash from the old to the new lender and updating the Land Registry with your new lender’s details, which is done by a solicitor.

If you’re switching to a new lender, all you have to do now is make a final payment and the associated fees. You can transfer the funds via a CHAPS payment, in a bank, or even with a check. 

At this stage, the lender will send you the title deeds. You can either give them to your solicitor or keep them.

What Is the Right of Redemption?

The right of redemption is a legal process that allows mortgage borrowers, who have defaulted on their payments, to reclaim the property by paying the amount they own, including interest and penalties. 

There is always a specified date after which the borrower can no longer redeem the property. If you fail to pay on time, the lender will take ownership of the property and file legal charges against you for the money owed.

What Is Mortgage Redemption Insurance?

Mortgage redemption insurance is a type of life insurance that would repay the owed amount in case the mortgage borrower dies before the loan is paid out.

For that reason, mortgage repayments often have a clause for a declining term life insurance policy. In case of death, the insurance company will transfer funds to the beneficiary to repay the debt.

What Is a Redemption Statement and How Do You Get One?

A redemption statement contains all details related to the mortgage, including the amount owed, interest, and accompanying fees. 

If you’re repaying your mortgage, the redemption statement will show how much you owe, and if you’re remortgaging, it’ll feature the sum you need to borrow. The redemption statement only lasts for 4 weeks due to fluctuations in interest rates.

If you pay after the 4 weeks have passed, you’ll be charged additional interest. 

To get a redemption statement, you’ll have to contact your lender. 

Can I Get a Mortgage Without an Early Redemption Fee?

Some forms of mortgages, such as tracker or standard variable rate (SVR) mortgages, do not have early redemption penalties. 

However, if your initial agreement expires, your mortgage will most likely transition to an SVR; remortgaging is frequently done to avoid the SVR since it can be significantly more expensive. In fact in 2019, there was a 5.9% increase in new remortgages with additional borrowing.

When an Early Redemption Fee May Apply

Barclays, Santander, and Halifax are some of the best mortgage exit fee providers in the UK.  Here’s when they charge a redemption fee for paying off a mortgage loan early.  

BarclaysHalifax Santander 
If the mortgage deal is near the end.
If you’re moving to a new lender.
If you transfer a loan from one house to another.
In cases of Transfer of Equity or Porting.
At the end of the mortgage term.
If you switch to a new lender.
If you move a loan from one property to another.
If you pay more than what your mortgage terms and conditions permit.
If you switch mortgages during a particular rate period (for example, while on a fixed interest rate).

Bottom Line

What is a redemption fee on a mortgage? It’s a fee that mortgage borrowers pay when redeeming a mortgage or switching to a new lender. If you want to know if a redemption penalty is worth it, it’s best to check with the lender. They’ll be able to give you a full report of what you owe and how much that would cost.