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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.
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.
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|
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.”
Borrowers can read more in our guide What are mortgage redemption fees.
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