In the UK, mortgage redemption is the process in which a mortgage is repaid in full. A mortgage loan is lending secured on a property and could either be taken in out in order to purchase a property or to secure additional lending on the property at a later time. People may redeem their mortgage for varying reasons, including reaching the natural term of a capital repayment mortgage or simply moving home.
Repayment in full
Mortgage loans may me be arranged on either a capital repayment or interest-only repayment basis. In a capital repayment mortgage, monthly repayments include interest payments and payments off the balance of the loan. This means that the borrowing will reduce gradually and be redeemed in full with the final payment. Interest only loans charge the interest payments alone each month, meaning that borrowers will need to repay the full loan in one lump sum at the end of the term. In some cases, people may wish to redeem their mortgage early to save money on interest and reduce outgoings.
Moving home or lender
Homeowners may need to redeem their mortgage because they are moving to a new property or a new lender. When it comes to moving home, mortgages must be redeemed, or cleared in full, from the money raised in the sale of the home. A new mortgage will then be taken out on a new property. People may also move their mortgage to a new lender without moving home. If another bank or building society is offering a lower rate of interest than a person’s current provider, it may be profitable to move the loan. However, it is important to check whether any charges will apply for doing this.
Unless a mortgage is being redeemed naturally at the end of a capital repayment mortgage’s loan term, borrowers will need to request a redemption statement from their lender in order to find out how much it will cost to redeem their mortgage. The balance shown on a recent mortgage statement will not show all charges involved in repaying the mortgage. A redemption statement will include the outstanding mortgage balance and may also include interest that has accrued since the last payment was made, if payments are made one month in arrears. Early repayment charges and redemption fees may also be included and these vary between lenders.
Early redemption considerations
Redeeming a mortgage early can save money on interest payments. However, there are other factors to consider. For example, it may be beneficial to clear other debts with higher rates of interest, such as credit cards, first. If a mortgage has a low interest rate, it may be safer to hold onto savings in case they are needed for an emergency. Early repayment charges can also apply when a mortgage is on a fixed rate. In this case, it may be better to redeem the mortgage at the end of the fixed rate term when charges will no longer apply.