Early Redemption Charge
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(sometimes referred to as a
‘redemption penalty’)
Given that the mortgage market is very competitive many mortgages are
sold as ‘loss leaders’ ie the mortgage has to be held for a number of
years before the lender breaks into profit. As a consequence lenders
frequently ‘lock-in’ borrowers by applying Early Redemption Charges for
those paying off the mortgage early. Charges can be significant e.g. 6
months interest or repayment of the amount of benefit received, be it
cashback or reduced interest. The period an Early Redemption Charge
applies can vary. Sometimes it will match the period of the discount/fix
but often it can go beyond the benefit period eg. a 5 year discount with
a 7 year ERC. This is referred to as a ‘redemption overhang’. On this
subject see ‘No Redemption’ and ‘No Overhang’ below. |
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No Redemption
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A 'No redemption' option means that
the mortgage scheme will allow you to repay the loan in full at any time
without applying an Early Redemption Charge. Most mortgage
schemes, in return for offering you a lower initial rate, will require
you to stay with that scheme at least for the period of the Discount,
Fix or Cap, and often longer. If you wish to repay the loan in this
time, or you remortgage with another lender, you will have to pay an
Early Redemption Charge which can cost thousands of pounds (6 months
interest is common) depending on the lender and scheme. With 'No
Redemption' mortgages you will not have to pay this redemption fee
(although there may still be other costs such as sealing fees and legal
fees). As a consequence of not being ‘locked-in’, the rate offered on
these schemes will usually not be as competitive as for mortgages with
redemption penalties, making them most suitable for those who are likely
to keep track of current rates and wish to remortgage quickly if they
find a better rate, or those who may have to repay their loan in the
first few years. |
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No Overhang
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A 'No overhang' option means that the
mortgage scheme will allow you to repay the loan without penalty once
the benefit period has ended (ie. the mortgage does have an Early
Redemption Charge but it does not last longer than the fixed, capped or
discount period). This means that a mortgage with, for example, a
discount to 31st January 2006 will have a redemption charge to either
the same date or a date prior to this. The Early Redemption Charge
can represent a significant sum although the amount will differ between
lenders and between products. With 'No overhang' mortgages you will only
have to pay this redemption fee if you redeem the loan or remortgage
whilst you are still subject to the scheme's special rate. Once you have
reverted to paying the lender's Standard Variable Rate (SVR) you
will be able to redeem the loan without penalty (although there may
still be other costs such as sealing fees and legal fees.) As a
consequence of not locking-in the borrower to the lender's SVR, the rate
offered on these schemes will usually not be as competitive as for rates
with redemption overhangs, making them most suitable for those who wish
to benefit from a lower initial rate without needing a very low initial
rate, and who are likely to want to remortgage to another Discount, Fix
or Cap once they are no longer benefiting from the initial rate.
[TOP] |
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Mortgage Indemnity Charge
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(sometimes referred to as a High
Percentage Lending Fee)
For high Loan to Value (LTV) mortgages ie. where the loan is not
much less than the value of the property, it is common practice for the
lender to take out a form of ‘insurance’ to protect against some or all
of the losses incurred if the property needs to be taken into possession
because of serious arrears. It is common practice for lenders to pass
this charge on to the borrower. Depending on the amount of loan and the
LTV the Mortgage Indemnity Guarantee charge can be a significant
cost eg. a £47,500 mortgage on a purchase price/valuation of £50,000
would result in a £750 charge on a typical MIG charge of 7.5% on a
normal lending limit of 75% loan to value. Most lenders have a different
name for this charge ie. it may not appear on the mortgage Offer as
Mortgage Indemnity Charge or High Percentage Lending Fee. There are some
important facts to understand about the mortgage indemnity charge. It
acts as a form of insurance for the lender not the borrower. This means
that the lender can claim part or all of its ‘losses’ incurred
repossessing the property from the insurance company providing the MIG
cover. Note that even after repossession the former borrower will remain
liable for any sums owing (shortfall between selling price and mortgage
outstanding plus arrears, lenders legal costs and any other charges
applied to the mortgage) and can be pursued by the insurance company for
payment at a subsequent date. [TOP] |
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Valuation Fee
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The amount charged to conduct a
valuation of the property on behalf of the lender. It is important to
note that the valuation is carried out on behalf of the lender – not the
mortgage applicants! Frequently lenders include an administration fee as
part of the valuation fee collected to cover the costs of arranging the
valuation. The valuation does not represent a detailed inspection. For
peace of mind it may be appropriate to obtain a ‘Housebuyers Report’
or a ‘Full Structural Survey’. These are more detailed than a
lender valuation but they produced on behalf of the applicant. They are
more expensive than the lenders valuation. [TOP] |
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Booking and Arrangement Fees
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Both are up-front fees charges levied
at the outset of the mortgage. A booking fee will normally be required
with the application form. A booking fee is paid to reserve funds on a
mortgage product that has limited funds available e.g. a first-come,
first-served fixed rate. Booking fees are often non-refundable, so if
the mortgage applicant cancels the mortgage application before
completion the fee will not be reimbursed. An arrangement fee is
typically charged on completion of the mortgage. Arrangement fees are
common on fixed and capped rate mortgages. Frequently they can be added
to the mortgage hence the fee does not become an ‘out of pocket’
expense. [TOP] |
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Legal Fees
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It is necessary to have a solicitor
or licensed conveyancer to act on behalf of the mortgage applicant and
the lender in the house purchase or remortgage transaction. The costs
will be greater for house purchase than for remortgage. It is the role
of the solicitor or licensed conveyancer to note ownership of the
property on the title deeds; note the lenders interest in the property;
register with the Land Registry and conduct searches to identify if
there may be factors which could affect the property e.g. coal mining
search to check for subsidence; check to see if there are some planned
major road developments going through the back garden etc.
[TOP] |
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Insurance
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Lenders will insist that the property is adequately
insured, with a suitable Buildings Insurance Policy, as it
represents security against the mortgage debt. A buildings policy covers
against storm damage, fire, flooding etc and relates to the fabric of
the house or flat etc. It is normal for lenders to check that any policy
arranged is adequate and a fee will sometimes be levied to check the
policy, if the borrowers take a policy other than the one sold or
recommended by the lender. In addition, borrowers will need a
Contents Policy that provides cover for the contents, such as
carpets, TV’s, furniture etc. Most lenders and insurance companies offer
a combined Buildings and Contents Policy. In the past some lenders have
made their insurance compulsory with some very competitive mortgage
products although this is less common now. Another form of insurance
common in the mortgage industry is a Mortgage Payment Protection Plan.
This policy is designed to offer income protection against unemployment,
sickness and redundancy. This form of insurance has become more
important as the Department of Social Security has steadily withdrawn
the benefits available. This form of insurance is not compulsory.
Another form of insurance is Mortgage Indemnity Guarantee. This
is covered above. [TOP] |
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THINK CAREFULLY BEFORE SECURING
OTHER DEBTS AGAINST YOUR HOUSE. YOUR HOME MAY BE REPOSSESSED IF YOU DO
NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. TYPICAL APR 7.50% VARIABLE.
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