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Define: Early Redemption Penalties

More and more attention is being paid to APRs when people are shopping around for loans. This is not surprising as the very reason the APR was introduced was provide a standard figure that customers could use to compare the prices of loans without getting our their calculators and doing the math themselves. However, there are many other potential charges when taking on credit and it would be a mistake to ignore these and put all your concentration the single APR figure.

One of the charges that can become the most significant is the early redemption charge or penalty. These are charges included in a loan agreement that will be levied on the customer if they wish to repay the loan early. The ability to repay a loan early is probably the most important flexibility issue with all credit as it means that you can take advantage of extra cash that comes your way to get out of the loan. Since interest is calculated based on how long the loan is outstanding, this gives you the potential of saving literally thousands of pounds in interest charges.

Early redemption penalties can be included on any type of loan, with the exception of credit cards and overdrafts that always allow you to repay the balance as you wish. They are most important however, in the context of mortgages. Many people buy a home with the intention of staying there only for a short period of say a year or two. Many others, may find that circumstances force them to move sooner than they would have expected, for example if their family has grown or they move jobs. These possibilities should be planned for, particularly for young people and first time buyers, and they should consider early redemption penalties carefully before committing to a new mortgage.

Many mortgages will be without early redemption penalties and these will be a wise option for people who feel there is a possibility that they will want to repay their loan early. However, it is quite common with discount mortgages, which give you a lower rate of interest for a set introductory period, usually two years, for early redemption penalties to exist. A typical example would be a mortgage with an early redemption penalty of two per cent if redeemed in the first year, one per cent for the second year and zero thereafter. These may seem like fair charges and in general they are, but consider the circumstances where a couple take out a £100,000 mortgage and then find they have to move house within one year. They will be subject to a £2,000 early redemption penalty. This is surely something most people would wish to avoid.

The fact of the matter however, is that such charges can be avoided quite simply. All you have to do is be aware of the early redemption penalties when you are looking for a loan, mortgage or re-mortgage, and make sure you are happy with the degree of flexibility that the loan offers. If you feel that you cannot be certain that you will not need to repay the loan during the tie in period, then search for a loan that does not charge early redemption penalties.

An issue related to early redemption penalties, is whether or not the loan will allow you to make overpayments. Overpayments are a very useful way for people with an increase in income to pay off their mortgage faster. If you look at an online mortgage calculator, you would be amazed to see the difference that it makes to the length of your mortgage if you make something around a £50 over payment. Therefore flexibility can be very important so make sure you are aware of the early redemption penalties and overpayment policies on a loan before you sign yourself up.

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