Redemption penalties - This is where the lender imposes a penalty on the mortgage loan if it is repaid or part repaid during the term of the loan. When taking out a mortgage it is important to establish the redemption penalties. In practice many lenders now do not charge an early redemption penalty where the borrower is on the lenders variable rate. However the majority of lenders charge penalties if the borrower selects a fixed, discounted or capped offer. There are two areas of penalty;

Early redemption penalty during offer rate - The lender charges a penalty for part or full repayment of the loan during a fixed, discounted or capped period i.e. If the borrower has a five year fixed mortgage and pays off the loan after 1 year, there may be a penalty of six months extra interest.

Early redemption penalty after offer rate (extended redemption penalties)- The lender may offer a fixed, discounted or capped rate for a fixed period. At the end of this period the mortgage reverts to the variable rate but retains early redemption penalties for a further period. For example a lender may offer a two year fixed rate with redemption penalties for five years. It is most important that when a loan is being considered that redemption penalties are thoroughly researched. Often the lowest interest rates have the longest penalties. If you have a mortgage with no penalties after the offer rate, the borrower has the opportunity to take a further fixed, discounted or capped rate as soon as the original period expires. Unless there are specific circumstances the borrower should try to avoid extended redemption penalties.

Life Insurance - When a person has a mortgage it is advisable but not usually compulsory for the borrower(s) to take out life insurance so that in the event of a death of one of the borrowers the mortgage is repaid. For an additional cost the borrower may extend the insurance to cover critical illness, this enables the mortgage to be repaid from the proceeds of the policy in the event of death or critical illness. The lowest price life insurance attached to a repayment mortgage is called mortgage protection insurance, where the borrower insures for the mortgage amount and the life insurance cover reduces as the mortgage amount outstanding reduces. The cost of cover varies between different insurance companies and therefore it is worth obtaining quotations from a number of insurance companies or this service may also be offered by your mortgage broker if they are also an or linked to an independent financial adviser. Different alternatives would need to be considered for an interest only loan depending on what type of investment if any is linked to the loan. The borrower may obtain the advice of the options available from the lender, the mortgage broker or an independent financial adviser.

Disclaimer: Information is for guidance purposes only. If you are in any doubt as to the suitability of the contracts offered please consult an independent financial adviser. PIA do not regulate mortgage protection and not all forms of critical illness insurance and income protection products.