Are mortgage redemption penalties legal?

andrewc_2

Hello,

Does anybody have any information which relates to the legality of mortgage redemption penalties?
These are the fees, usually a % of the original loan, which are charged if the borrower redeems the mortgage during a special offer fixed or discounted rate period.

My opinion is that these fees bare no relation to the actual cost of redemption and therefore may be illegal under the Unfair Contracts Terms legislation.

Any advise of personal experiences would be very helpful.

Thanks, Andrewc

exil

It is compensation to the lender for the interest you are no longer going to pay.

As such at least part of it - if not all - is genuinely the cost of you redeeming early.

dunstonh

You have no hope in hell of classing them as illegal.

When lenders issue borrowing on special terms, they obtain the money themselves at special rates. Often by borrowing it themselves or using another class of business to offset against it. If you repay the mortgage early, the lender is still tied themselves to what they borrowed or may have a commitment on the other class of business which needs to be honoured. The penalty ensures they do not lose out financially.

I suggest you look into the economics of money lending at retail banking level to understand why these charges exist before you think about calling them illegal.

Also, you signed the contract. You had the option to sign it with a solicitor present who would have explained your commitment. If you did that, then you went into that contract with yours open and fully aware of the costs. If you didnt use to solicitor for that, then its your own fault for signing the contract without knowing the consequences of your actions.

Joe_Bloggs

I managed to find a cached copy of the OFT's take on the 1999 [size=-1] Unfair Terms in Consumer Contract Regulations 1999[/size]. This link to this page is missing from their main site. I think the early repayment charges should be proportional to the amount owed and they should decrease with time. The Nationwide has it pretty fair in my view.
J_B.

HelpWhereIcan

Most lender's early repayment charges do decrease with time, but agreed some are steeper than others. I do not think that this neccesarily means that they are unfair as in most cases they reflect the cost to the lender not of redeeming the mortgage, but of providing the incentive rate (ie discounted or fixed rate etc) in the first place. After all, the lender could have diverted their resources towards another product/area of business.

Just to add a footnote, imho, should there come a time when early repayment charges are overturned en masse; it will actually be a case of consumer power leading to a reduction in consumer choice as lenders revert to 'safe' products that are closer to SVR or less flexible or that offer fewer incentives such as cash back, free valuations, free legal fees, unsecured facilities etc etc.

stanmoresaver

HelpWhereIcan wrote:

it will actually be a case of consumer power leading to a reduction in consumer choice as lenders revert to 'safe' products that are closer to SVR or less flexible or that offer fewer incentives such as cash back, free valuations, free legal fees, unsecured facilities etc etc.

Good point-well made!

Joe_Bloggs

There would perhaps be more consumer choice if capet baggers had not sold out mutual building societies ultimately to their banking rivals. This was perhaps a consumer led error, driven by short term greed for shares.

Lenders allready revert to safe products that are exactly SVR ! It is a rate that they think they can get away without triggering a flight response in the majority of their borrowers. An SVR may also be an oppertunity to remortgage in house and sell some other stuff too via a 'mortgage review' charade. These are just my views and are probably not shared by anyone.

J_B.

A Footnote.
There are a lot of names in front of financial institutions but are there less names behind them? Has there been a bit of lender consolidation masked by keeping the old 'glove puppet' names out front ?

AndrewSmith

Consumer power always ultimately leads to a reduction in the choice available, and in most cases an increase in end user costs.

Examples of that are:

Stoozing - Credit Card companies are beginning to get wise to this and are now introducing 'handeling fees' on 0% balance transfers some as high as 3%.

Remortgaging / Rate Switching / Tarting, Again lenders have become wise to this now and many who offer lower rates are now charging up to 1.5% as an arrangement fee, or offering a rate nearer SVR with a lower fee attached.

It's the same with everything to do with finance. The best ideas are the ones that not many people get to know about. As soon as they are widely publicised they immediately have a limited shelf life, with the opportunity disappearing altogether eventually or becoming financially unviable because of charges or conditions.

JB Footnote

Over recent years there have been a number of lender consolidations, however in most cases they are still run as individual companies keeping the individual underwriting and lending policies of the original company.

Andy

Joe_Bloggs

@Andy and all .
0% credit card rates are an invitation to financial ruin if you can't handle money. Putting a few percent on transfers is not going to deter their intended victims. People should be educated in dealing with their own finances.

Savings rates are examples of financial deals that have been initially available to a select few and are then withdrawn due to overwhelming demand. There is often a ripple effect that radiates outwards to many saving institutions when one lender changes their rate.

I know lenders are offering low rates with 1.5% remortgage fee. It is important that the public can see through this trickery . Some credit card lenders charge 30% plus. They increase your credit limit, month after month, hindering you from obtaining cheaper credit. This is probably just my experience of MBNA.


A bitter and twisted footnote.
Is the unwritten strategy of big business is to take over /merge with the opposition and not to be found reducing competition. Is the ultimate aim of many new enterprises, to sell up and be taken over by a bigger rival ?

J_B.

.

andrewc_2

Hello and thanks for all of your comments with the exception of the following:

Specific response to dunstonh and his response:

'You have no hope in hell of classing them as illegal'.

Presumably you can support this aggressive statement with case law. No ?
Why doesn't that surprise me.

Your comments re consequences of the contract. I am well aware of the consequences of such a contract. Your points are irrelevant. The legality of a contract's terms determine the parties ability to enforce.

Your generic and dismissive comments do not address the legality of overhanging penalties and the legality of such under certain circumstances. Any party attempting to enforce a contract will offer this immediate response. It is in itself, no defence unless proven. In my case, the lender as refused to provide support for their stance.

To all readers, please note that 'independent financial advisors' are often offering producrs from a very limited range of providers, with whom they have introducer relationships. So much for 'independent' financial advice.

MortgageGenie

Hi andrewc,

I seem to remember sometime in the late 90's Natwest was challenged over their redemption penalties and were forced to amend their terms. I can recall the facts surrounding this but you may want to have a look at this research paper which deals with redemption penalties. (may be out dated)

HTH