What is a Redemption Penalty?

 

A charge levied by a lender on the early repayment of a loan. Redemption penalties are common in mortgage loans and must be specified in the mortgage offer before it is signed. Lenders expect to make a certain level of profit on their loans through the interest they charge. If a loan is repaid early, it means that interest will be charged for a shorter period and the loan will be less profitable for the lender. Redemption penalties may also be charged on overpayment of mortgages i.e. when a borrower overpays their monthly mortgage payments beyond a specified level, usually 10%.

 

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