Looked everywhere on here........

[rbrears]

For my part I think Robertxc and Surreyscouse have good instinct.

 

Mortgage redemption works rather differently than appears in post no. 8 above - you are not locked into a mortgage agreement for the term. There is an equitable right of redemption that attaches to mortgages - the borrower is entitled to redeem the mortgage at any time. This right arose many years ago to deal with unsavoury money lenders. What used to happen was that a borrower would grant a mortgage to a lender which would be repayable on x date in the future. The borrower at that time was only entitled to repay on that date. The borrower would make all the mortgage repayments (if any were due since many mortgages were simply loans with interest repayable in full one one day in the future) and then on the last day, the day for repayment, the lender would dissapear for the day so that the borrower could not make the repayment. Result? Thr borrower was in breach and the lender repossessed a property where the borrower was wanting to make the final repayment. Hence the court of equity introduced the equitable right of redemption so that this unsavoury practice could be stopped. (End of history lesson lol )

 

But what is a mortgage agreement? It is a contract. What is an early redemption penalty? It can only be a liquidated damages clause. The lender effectively gives you some benefit (lower interest rate) that causes a loss to it (you pay less interest for a period than the ususal rate) and for which a damages clause applies if you redeem during the given period (early redemption). The lender expects over the course of the given period to keep your business and makes a loss if you leave before the period expires.

 

So, the lender suffers loss. What is the loss and is it the same amount as they actually charge? If not it may be a penalty clause and (fanfare) unenforceable.

 

Keep us posted Surreyscouse - best of luck and will be following with interest (not that I have a redemption penalty to reclaim but just generally )

[rbrears]

The lender lends the money at a loss of usual profit for the period in question. So your loan is x% lower than the lender's usual variable rate, or they give you a thumping great cashback at the start, or whatever......

 

The redemption penalty usually gets smaller as time passes - i.e.as the lender's losses come to an end - the low rate period/cashback period will be designed by the lender so that when the period expires the "loss" is made up - that's why you have to stay in for x years or pay a penalty.

 

I wouldn't worry about other borrowers - the loss relates to the specific contract between the lender and the borrower and the "loss" is incorporated in that agreement and made up by the borrower staying and paying for a defined period.