Mortgage redemption penalties

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Redemption penalties that are often levied if you switch mortgage provider before a fixed or discount deal ends are the hot topic in the mortgage world at the moment. But a mortgage broker has brought a more sneaky exit charge to Doghouse’s attention – the discharge fee, which applies when a borrower pays off the mortgage or switches to another lender regardless of any redemption penalties.

In the past, lenders typically used to recover the costs of competitive mortgages by moving borrowers on to higher-standard variable (SVR) rates at the end of a deal. But, as people become more financially aware, many are remortgaging when their deal ends, rather than paying the SVR.

To stop this, lenders are increasing their administration charges when loans are paid off or people switch to another lender. These charges are known as deeds, discharge, exit, redemption or sealing fees.

The sneaky thing about these fees, says Kimberworth mortgage brokers, is that they are often hidden in the paperwork so people closing their mortgage are suddenly presented with a bill for up to £300.

Alliance & Leicester’s current discharge fee of £295 is one of the highest and it has risen considerably in the past two years. Yorkshire building society charges £199, the Nationwide has recently started charging and now asks for £90, and at the Royal Bank of Scotland the fee has gone from £75 to £225 in the past few years.

Sally Lauder, press manager at Alliance & Leicester, defended the discharge fee: “The key issue for customers is overall value – in other words the total amount they pay – including the interest rates and all fees and charges.”

No one seems to be able to offer any justification for the rise in fees because the administration costs of releasing deeds have actually decreased with electronic communications.

And for those borrowers who think that only rate tarts who constantly hop from one mortgage lender to another will suffer the charges, then think again. Even those who have been with the same lender for 25 years will have to pay up when it’s time to redeem their loan.

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