Redemption Penalty - Northern Rock 5yr Fixed

Cappuccino

Hi. My wife and I have a fixed rate mortgage for £137,000 with Northern Rock for 5 years, which we took out in November 2006, so the end of the fixed rate period is November 2011.

We are considering emmigrating to Canada by the end of next year and may wish to try to sell the house somewhere between Summer 2010 to Winter 2010 (e.g. between 1 year and 1.5 years before our fixed rate deal ends). It largely depends on house prices also, because our house has fallen from the £144,000 we paid for it (I put a £7,000 deposit on it) to around £125k to £130k, and since we at about £131k owing on our mortgage we are technically in negative equity. Hoping by next year we'll have paid enough off the mortgage and the house prices going up a bit to counter this.

Now, if I understand the charges correctly with Northern Rock, we have to pay around £5000 if we cancel within the first 4 years, and about £4000 if we cancel within the final year, of the 5 year period. I get it that these charges are in place to protect the lender against the cost of our terminating our agreement early, but they do seem to me to be unlawfully high and disproportionate.

Surely the cost to the bank is greater if we cancel in the first year than if we cancel in the 4th year, since we've paid a lot more interest to them by the 4th year, so why must we pay the same redemption penalty back as we would if we cancelled early on?

Also I would like to ask - do the same laws apply to redemption penalties as other bank charges, in that the charge must fairly reflect the genuine cost and risk to the bank in question? If so I do not see how they can make people pay the same amount for redeeming in the 4th year as the 1st year of the 5 year period.

Has anyone had any success in disputing redemption penalties? Or any way around this?

Our only other option would be to rent the house out whilst we are abroad until after the redemption penalty period ends (we may have to do this anyway depending on house price movements next year).

Many thanks for any advice anyone can give me in this matter,
Wayne.

Anon

It is worth reading the sticky thread at the top. Basically, no, noone has successfully disputed the redemption as it is not a penalty, but a charge. You took out the mortgage on those T&Cs and agreed that %, if it goes down (ie the amount reduces as it a % of remaining balance) then these were deemed appropriate. They are not unlawful. It seems a lot, but as Northern Rock had to secure money for that period, then this covers the cost to them.

Sorry.

Anon

Cappuccino

Hi -thanks for the response, and certainly will be reading through other posts and stickies on the forum.

The thing I cannot really understand is how the cost to the bank can be the same whether we cancel 1 minute into the 5 year period, or cancel with only 13 months left to run? If we cancelled early on in the contract then £5000 would seem a fair amount to pay. But after 4 years NR would have charged us almost £30,000 in interest, so surely the risk and cost to them at that stage would be much much less?

Anyway thanks for the post

Wayne.

Robert_Sterling_3

Now, if I understand the charges correctly with Northern Rock, we have to pay around £5000 if we cancel within the first 4 years, and about £4000 if we cancel within the final year, of the 5 year period. I get it that these charges are in place to protect the lender against the cost of our terminating our agreement early, but they do seem to me to be unlawfully high and disproportionate.

The charges are perfectly lawful.
We take fixed rates because they are fixed.
We gain from this if other rates go up.
We lose from this if they go down.

Surely the cost to the bank is greater if we cancel in the first year than if we cancel in the 4th year, since we've paid a lot more interest to them by the 4th year, so why must we pay the same redemption penalty back as we would if we cancelled early on?

I can see where you are coming from here.
Nationwide did have a scheme where the redemtion penalty reduced each year as a % of the Early Repayment made.
Now they no longer do that. The 3% is constant throughout the period of the loan.
I do not have the details of what Norhern Rock do but you will have had the details in the Terms & Condition of your mortgage with them.

Also I would like to ask - do the same laws apply to redemption penalties as other bank charges.

I think that they do not apply in this situation.

Or any way around this?

I do not that there is a way round it.

Our only other option would be to rent the house out whilst we are abroad until after the redemption penalty period ends (we may have to do this anyway depending on house price movements next year).

I agree.

I am sorry that I can not give you any encouraging news.

Other better informed posters than I might be able to be more optimistic.

Best wishes in respect of your move to Canada.

dunstonh

The thing I cannot really understand is how the cost to the bank can be the same whether we cancel 1 minute into the 5 year period, or cancel with only 13 months left to run?

Generally the standard model is for the charge to reduce over the period.

The charge is there because effectively the lender borrows the money from investors who will be paid a certain rate of return. They will be paid whether you stay to the end or you finish early. So, the lender has to protect themselves from you doing this and the ERC is the way to do it.

Also I would like to ask - do the same laws apply to redemption penalties as other bank charges

Not even close. ERCs are a contract event which you agree to in exchange for non standard terms (special offer). In exchange for those special terms, you agree to stay with them. The terms are on the KFI issued pre-sale (often twice) and in the mortgage offer letter which is your contract. Everything is defined up front and in writing.

_Andy_

If you think the charges are so unfair, why did you take the mortgage out in the first place?

Robert_Sterling_3

dunstonh wrote: »

The charge is there because effectively the lender borrows the money from investors who will be paid a certain rate of return. They will be paid whether you stay to the end or you finish early. So, the lender has to protect themselves from you doing this and the ERC is the way to do it.

Having a decreasing penalty is consisitent with your statement above. In the fifth year the lender is only exposed for one year and not five years. I guess that is why Nationwide had a decreasing penalty until quite recently.

Cappuccino

_Andy_ wrote: »

If you think the charges are so unfair, why did you take the mortgage out in the first place?

Ah, a victim of our own stupidity, largely When we took the mortgage out we never dreamt we'd be leaving this country within 5 years. We were told by the mortgage advisor that it was a highly flexible mortage and was fully portable to another property. Since we thought the only way we'd sell would be to buy another UK property there didn't seem to be any down side.

We weren't actually told about a redemption penalty by the mortgage advisor (admittedly we never asked the question, but...), and only when recently we'd been thinking about selling did we find out about them.

Yes, technically we should have read all the fine print before signing, but honestly - who does read all the fine print? We rely on people like mortgage advisors to point out these things, and it's only because our circumstances have changed that we're now facing realities we didn't think we'd be facing when we first took the mortage out.

The fact that the base rate has dropped so drammatically since we took out our mortgage means we not only would we have to pay the redemption penalty, but are also having to pay Northern Rock more interest than customers on tracker mortgage, and probably those on variable rates. Add to that the fact that our house value has dropped by almost £20k (despite getting a "good price" for it at the time - other people were paying £10k more for similar properties - and since vastly improving the property) and we've kinda been stung 3 ways!

Also, as I understand it bank charges are also in the T&Cs of taking out a bank charge. Yet banks are not allowed to charge more than the genuine cost to them of going overdrawn, setting up credit etc, so why are mortgage penalties any different?

Anyway thanks for everyone's comments, I will keep reading and researching - sounds like there is almost certainly nothing we can do about this situation but it's worth some more investigation I feel

dunstonh

We weren't actually told about a redemption penalty by the mortgage advisor (admittedly we never asked the question, but...), and only when recently we'd been thinking about selling did we find out about them.

Did you need see it on the key features illustration or the mortgage contract offer letter and did your solicitor not point it out to you (if you used one)?

Yes, technically we should have read all the fine print before signing, but honestly - who does read all the fine print?

These are not small print things. They appear quite clear on the key features illustration. This is only a small number of pages which tells you what your rate is, how much the costs are and what the tie ins are.

I have never known anyone not know they had a tie in. So, I would have to say its quite rare for someone not to read a small number of pages in large print when making what is the most or second biggest purchase in their life.

Also, as I understand it bank charges are also in the T&Cs of taking out a bank charge. Yet banks are not allowed to charge more than the genuine cost to them of going overdrawn, setting up credit etc, so why are mortgage penalties any different?

First of all there has been no ruling on whether overdraft charges are lawful or not. Secondly, it isnt the fact there is a charge but the size of the charge the banks make. Thirdly, you dont sign a contract outlining all the terms in advance and in return get something beneficial for it with overdraft penalty charges. With a mortgage deal you are buying a special offer product.

Anon

dunstonh wrote: »

First of all there has been no ruling on whether overdraft charges are lawful or not.

Agree with much of what you say - for info, news came out today (on Moneywise anyway) that bank overdraft charges are unlawful but no doubt banks will appeal again http://www.moneywise.co.uk/everyday-money/banking-borrowing/article/2009/02/26/what-does-the-bank-charges-court-case-mean-you?utm_source=Newsletter2009-02-26&amp%3Butm_medium=Email&amp%3Butm_campaign=ContentPromotion .

Anon

dunstonh

Anon wrote: »

Agree with much of what you say - for info, news came out today (on Moneywise anyway) that bank overdraft charges are unlawful but no doubt banks will appeal again http://www.moneywise.co.uk/everyday-money/banking-borrowing/article/2009/02/26/what-does-the-bank-charges-court-case-mean-you?utm_source=Newsletter2009-02-26&amp%3Butm_medium=Email&amp%3Butm_campaign=ContentPromotion .

Anon

As I understand the ruling that came out today, it wasnt that they were unlawful but whether the OFT had the powers or not to look into them as being unfair. The ruling was that they do. The OFT has yet to say that the levels are unfair but its likely they will (if you use the OFT research on credit cards where it said a lower fee of £16 was more reasonable).