• Penalties can make home ownership more expensive.Hipoteca 2 image by Nuka from Fotolia.com
  
  Mortgages in the United Kingdom are regulated by the Financial Services Authority. Lenders impose a variety of penalties based on the amount borrowed, whether a borrower pays on time, and whether the borrower wishes to repay the loan early. Some of these penalties relate to the trend towards loans where a special low rate applies in the early years of the mortgage period.
  
  

Early Redemption Penalty

• This is a penalty that applies when a borrower wishes to pay the balance of their mortgage loan before the agreed-upon completion date. Most commonly, this applies to a mortgage at a fixed interest rate, particularly one where the rate is an introductory discount.
  
  Usually the penalty applies for the duration of the fixed or discounted rate. This means that in many cases the borrower may not be attempting to repay the loan because they have the cash, but rather because they wish to switch the mortgage to another lender at a cheaper rate. The purpose of the penalty is to deter such switching.
  
  In some cases, there is an extended redemption penalty that applies for a fixed period after a short-term rate has ended. During this time, the lender is forced to pay the company's variable rate, or even a higher rate, or face a penalty if they switch.
  
  Lenders usually defend such penalties by arguing that the penalty partially compensates them for the interest they would have earned if the loan had lasted its full term.
  
  

Higher Lending Fees

• This is a penalty applied to new loans where the value of the loan is more than a certain proportion of the property's value at the time the loan begins, usually 90%. The penalty is a lump sum payment by the borrower to the lender, often around 1.5% of the loan total.
  
  The theory behind such fees is that there is a greater risk that if the bank repossesses the home, the amount it can sell the property for will not be enough to cover the outstanding loan amount. The fee covers the lender taking out an insurance policy against this risk, though sometimes part of the fee will be kept by the lender as profit.
  
  

Arrears Penalties

• Lenders impose a variety of penalties on borrowers who have fallen behind with payments. This can include a penalty for late payment, charges for letters or phone calls to borrowers to inform them of the arrears and obtain payment, and even charges for arranging for the borrower to get debt management advice. In 2010, U.K. law changed, and lenders are now prohibited from charging additional interest on the late payment penalty itself. They must also allocate any money the borrower gives them to the late payments and only put this money towards penalties once the payments are up to date.