Redemption penalties

Building societies yesterday backed away from an outright call to ban redemption penalties on variable rate mortgages but said there was an urgent need for more transparency in mortgage selling.

The Buildings Societies Association said redemption penalties had increased the complexity of mortgages and caused existing customers to get a poor deal compared to new customers.

Redemption penalties lock customers in to a loan for a set period unless they pay a penalty, typically 5 per cent of the outstanding loan. They are most frequently used in mortgages where the lenders is taking a loss upfront in order to attract new business. These include discounted mortgages - where a lower rate is paid for the first few years - and cashbacks, where borrowers get a cash lump sum as part of the loan. Adrian Coles, director general of the BSA (pictured above) said the issue was becoming urgent because the housing market was slowing down, forcing lenders to compete in the re-mortgage market by using discounts and cashbacks.

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