Derin Clark

Derin Clark

Online Reporter
Published: 03/09/2019

Mortgage borrowers looking to capitalise on a possible base rate cut with a variable rate mortgage need to be careful that they are not hit by a hefty mortgage redemption penalty in the event that they decide to switch mortgage deals.

What is a redemption penalty?

Research from Moneyfacts.co.uk has found that just 279 out of a total 842 variable rate mortgages currently available do not contain a product redemption penalty. A product redemption penalty is a charge that borrowers are required to pay if they redeem the mortgage before the initial rate expires, for example, for the first two years, borrowers would be charged 4% of the outstanding balance.

Switching from a variable rate to a fixed rate

Some variable rate mortgage deals that have a redemption penalty allow borrowers to move from a variable rate mortgage to a fixed rate mortgage with the same provider without charging the additional fee – this is known as a ‘switch and fix’ or a ‘drop-lock’ feature. Research from Moneyfacts.co.uk found that 47 variable rate mortgages, most with an early redemption penalty, carry a ‘switch and fix’ or a ‘drop-lock’ feature.

Variable mortgage rate redemption analysis 

  All variable rate mortgages No redemption penalty With a redemption penalty With an extended redemption penalty (beyond initial rate period)
Number of products 842 279 482 81
Average rate 2.86% 3.01% 2.67% 3.42%

Darren Cook, finance expert at Moneyfacts.co.uk, said: “Variable interest rate mortgages that do not contain a redemption penalty open up an option to those borrowers who think that they may benefit from a potential fall in the Bank base rate, but also want the flexibility to redeem their mortgage without a hefty penalty and move to a fixed rate deal if base rate moves steeply in the opposite direction.

“New mortgage products that contain no redemption penalties generally charge a higher interest rate than their counterparts that do apply a penalty. As an indication, the average rate of all variable rate mortgages with a redemption penalty is currently 2.67%, while the average rate for no-penalty products is 3.01% – some 0.34% higher.

“Mortgage products with a switch and fix or drop-lock feature, allowing a borrower to switch to one of their existing lender’s fixed rate products, is the next level down from having full mortgage redemption flexibility on a product. Therefore, a borrower can move from a variable to a fixed rate mortgage when there appears to be a threat of prolonged interest rate increases, but the fixed rate products need to be from their existing borrower’s range. This may offer some welcome flexibility, without necessarily paying a higher rate of interest in order to avoid a hefty penalty to move away from a less favourable rate during a period in which economic predictions are proving near-impossible.” 

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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