Redemption Penalty - Are They Legal???

Paulxo

With all the talk of Bank Charges being unfair (I know because I've just got a cheque from Nationwide for £948), because they are a penalty, does this mean the same for a redemption penalty on your fixed mortgage?

Does it really cost the mortgage company £5000-6000 to get paid back??

Anyone know as I want to sell my house a year before my deal expires, and I'd like not to get hit by this massive unfair bill.

Appreciate your comments.

Paul Very New MoneySaver

furndire

They are illegal, but some people have had success claiming back, as they are unlawfully high. If you go to http://www.consumeractiongroup.co.uk/forums, you will find other people claiming/or who have claimed.

DavB93

Sorry for been thick, but does that mean you shouldn't have to pay early redemption figures as I'm in the same situation as the first poster.

scooter100_2

furndire wrote:

They are illegal, but some people have had success claiming back, as they are unlawfully high. If you go to http://www.consumeractiongroup.co.uk/forums, you will find other people claiming/or who have claimed.

would be very interested if this was true as i paid a £6000 redemption penalty
on a mortgage 4 years ago.

ukbondraider

I very much doubt they are illegal as otherwise no one would be paying them. The fact is they are there to cover potential shortfall for the Bank/Building society.

For example if you take out a 5 yr fixed the bank will immediately sell your mortgage in the financial markets at a fixed rate for that duration as well. If you pay them 5.50% fixed for 5 yrs they will likely hedge/sell for 3.50% for 5 yrs (i.e they recieve 5.50% from you but pay 3.50% to borrow the money in the first place, netting a profit of 2%). If you decide to pay early and redeem the mortgage in yr 3 then the mortgage company has to cover the 2 yr potential shortfall as they are still paying their 3.50% for borrowing the cash at the fixed duration of 5 yrs.

Therefore you cant expect this to be unlawful.

Robert_Sterling

Where a redemption penalty is shown in the terms and conditions of it loan it is legal.

Tootsie_Roll

Very interesting. With bank charges etc the problem is justifying the charge as an accurate reflection of the costs involved. I would say that for a mortgage redemption penalty it would be much easier as these days they are only related to fixed rate deals where the loss is easy to demonstrate.

ohmsoft

Yes these penaltys don't claim to be administration costs so rarely do banks need to justify them. They are a penalty that counters the cost of the bank commiting to a lower rate that their standard one.

The bank has to take the risk of interest rates increasing (as they are now) and therefore the loss they may incur - there is no way they can get out of the deal early even if rates rose greatly....In contrast they place a redemption penalty so customers wont be able to leave if rates go down, or have to redeem for other reasons.

Talk to them about a deal - maybe porting the mortgage to another product? or at least a partial waiver etc......for the amount quoted I would guess you have one of, A great deal already, a big mortgage, or recently comited to the deal?
It is more likely that you can get a waiver in a climate of rising rates as normally the bank can take your money back and lend it again at a higher rate......but that does not mean they will waive it!

regularsaver1

If you enter a fixed rate you agree to enter the terms and conditions and have tie in's for that period of time

if you do not want any penalties - there are options out there

jamesd

A study found that the early repayment charges for fixed rate mortgages generally accurately reflected the cost of the interest rate option you're being sold when you take one out. So, little reason to be unhappy about paying them, in general.

Addicted_to_Saving_Money

We recently sold our house and were on a 2 year fixed mortgage with Woolwich. The completion date was just 5 weeks before the fixed mortgage was due to end (we would then have reverted back to the standard variable rate or chosen a different offer). We had to pay an early repayment charge of approx £2,000 because we had come out of the mortgage just 5 weeks before the fixed rate ended, in addition to the redemption fee of approx. £1000.

Does anyone know if we could be successful in claiming some of this back. I understand a redemption fee is payable but we were astounded at the fee charged due to the mortgage ending before the 2 year fixed rate offer ended. We actually only had one more monthly payment to make before it would have ended! We offered to pay this extra monthly payment (approx £360) rather than have to be the early repayment charge but we were told this was not possible. And unfortunately the woman buying our house would not wait another month for completion.