What does Redemption mean?

Mortgage redemption involves the fact that you either want to switch lender for example, or you decide to pay off your mortgage earlier than its term. You are faced with certain penalties called “early redemption charges” especially when you contract a mortgage with very good terms (a fixed rate one or a discounted rate one).

Basically in exchange for these good terms, your lender requires these charges to be paid if you become sort of “un-loyal” to them by switching lender or finishing off payments earlier. The sooner you decide to finish with your payments, the higher the charge will be.
For example, if you have a 25 year term fixed rate mortgage, and you decide to pay it off in the first 5 years you might meet a penalty of 5%; this scenario basically includes that the lender loses 20 years worth of interest payments (loses a client) from you, which is why he is charging you with such an amount.

On the other hand if you pay off in the first 10 years, there might be a charge of only 1% or 2%. However, you should always carefully read through the fine print where terms and conditions are stated together with any early redemption fees, especially if you foresee you are moving in the future for example. Then, if your loan is not portable type, you will be faced with pretty high early redemption charges.