Question
Jon,
In the past I have had bad credit, mostly due to losing my job and not being able to pay back a credit card I had and also a car on HP. But I overcame that.
I went back to work, saved some money, and wanted to buy a property. I went to the bank I have been with for over 10 years and they said they would approve me for a mortgage to buy a flat I wanted.
That was 2 years ago.
Now I want to remortgage the flat as the interest rates have dropped. The bank informs me that in order to remortgage I need to pay them a 2% fee of the remaining balance on the loan in order to pay it off.
That makes no sense to me. I just want to pay them off and get the reduced interest rate with a different mortgage company.
Can you explain this?
Terrence
Answer
Terrence,
I believe what you are referring to is a “pre-payment” penalty, or early pay off fee, sometimes called early exit fee.
Many banks and lenders use these on some high-risk loans, but mostly they use them to insure they get a better return on the loan if the loan does not go the full term.
Without the exact details, I cannot give you a specific example, but think of it this way:
A bank lends someone £10,000 for 5 years, and they expect with the payments and interest rate to receive back £12,500, so they would make £2,500 over the 5 years.
If you pay the loan off early, they lose that interest, which is part of their investment.
By charging you a fee or rate to get out of the loan, they insure some return on their money, your loan.
I hope this clarifies the matter for you. You may wish to do the maths as to how much you will save with the new loan, against what you would be paying on the old loan, and also the pre-payment penalty.
Regards,
Jon