Mortgages - Costly To Get Out Of?
Twenty years ago, a lot of people took out fixed rate mortgages to try to protect themselves against higher rates. However, interest rates fell, sometimes very sharply, meaning that fixed rate borrowers were very often paying lots more than people with variable rate mortgages.
However, these borrowers could not get out because they were held in by large fees known as early redemption charges. Often these were greater than, or equal to the saving that could be made by moving to a lower cost loan, and the borrowers had to find the money when they exited the mortgage, often very hard to do.
The mortgage peoples argument for early redemption charges is that if they let you leave penalty free, you would have a sure thing of a bet, so you could remain in the fixed rate when it suited you, and escape out of it when the timing was right. There are similar penalties for exiting discount loans where you are promised a lower rate for many months or years.
Many penalties now last the minimum contract length on the loan, however they often reduce the closer the borrower is to the end of the mortgage deal. For instance, a five year fixed rate mortgage may have a penalty of five per cent of the loan in the first year,
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It is very rare now to find a penalty that carries on beyond the mortgage contract, but they do still exist. Try to stay away from these, as they allow the lender to hold on to you on their own terms. Often,
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There are a few ways that a money saver can reduce the cost of a mortgage, such as getting as large a deposit as possible, not taking up payment protection insurance, opting for interest only loans, Having daily interest calculations, avoiding flexible mortgages, and using an offset mortgage.
Remortgaging
Exchanging one loan for another has become increasingly popular, usually encouraged by brokers who receive fees for this practise. It usually results in lower costs, as many lenders will put you on a standard variable rate, which can be costly once your fixed rate ends,
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