Partial redemption refers to the lump sum payment towards the principal balance on a home loan without fully paying it off.
Partial redemptions occur frequently when homeowner have sizable sums of cash on hand, and instead of using them for investments, they choose to redeem part of the mortgage to save on interest rates.
This is especially common in times of rising interest rates.
When the loan principal outstanding is reduced, the bank could recast the loan to recalculate a new monthly installment payment.
Some housing loan contracts penalize borrowers for full redemptions with early redemption fees, but have no penalty fees for partial redemption.
So homeowners do not fully redeem a loan even though they have the funds to do so. Choosing to redeem the loan up to it’s minimum required principal balance.
This helps them save both on interest charges and the penalty fees which they might incur.
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