Redemption Penalty - Are They Legal???

furndire

Please ask Zootscoot on https://www.consumeractiongroup.co.uk/ and they will be able to answer your query.

regularsaver1

furndire -why are people taking out mortgage products with penalties then?

mountainofdebt

The interesting thing about redemption fees is that they are payable regardless of where you are in the lifetime of the mortgage.

We have recently come out the penalty period of our mortgage and are in a position (due to an inheritance) to pay off our mortgage. When we contacted the mortgage co to discuss the final redemption figure we were told that the £225 redemption figure that they would charge was to cover the administration of the lifetime of the mortgage.

Now can anyone tell me what administration would take place over the last 16 years provided all payments have been made on time and made by dd as everything seems to be automated.

Personally I think it is a last ditch attempt to squeeze that last little bit of money out you as you tell them where to stick their mortgage!!!

AndrewSmith

They are not illegal. They are a 'penalty charge' not an admin charge therefore do not have to reflect a true account of actual financial loss incurred.

It is a charge for you breaching the terms you agreed to when taking the mortgage product.

Similarly a parking fine does not represent actual financial loss to the council concerned it is merely a penalty imposed for breaching the parking rules.

You accept the possibility of penalties when you agree to the mortgage. It is not the lender's fault if you decide to redeem the mortgage early is it?

If you don't like the penalty attached to the product take a different mortgage.

ohmsoft

mountainofdebt wrote:

The interesting thing about redemption fees is that they are payable regardless of where you are in the lifetime of the mortgage.

We have recently come out the penalty period of our mortgage and are in a position (due to an inheritance) to pay off our mortgage. When we contacted the mortgage co to discuss the final redemption figure we were told that the £225 redemption figure that they would charge was to cover the administration of the lifetime of the mortgage.

Now can anyone tell me what administration would take place over the last 16 years provided all payments have been made on time and made by dd as everything seems to be automated.

Personally I think it is a last ditch attempt to squeeze that last little bit of money out you as you tell them where to stick their mortgage!!!

This charge sounds like a closing admin fee not and early repayment penalty......now these are a different kettle of fish and perhaps a little less "legal"? try and get your mortgage lender to break that fee down!!!

These fees are often waived if complained about

mountainofdebt

AndrewSmith wrote:

It is a charge for you breaching the terms you agreed to when taking the mortgage product.

If this is the case then why isn't the 'penalty' that has to be paid fixed at the time that a person takes out the mortgage rather than the person having to pay the 'penalty' applicable when the mortgage is redeemed?

jamesd

mountainofdebt, why make those who aren't going to move subsidise those who do? It's the ones who are ending the mortgage early who are costing the mortgage company money, not the ones who aren't, so it should be the ones moving who pay the cost, not everyone. Or you can choose a lender who charges a higher interest rate or arrangement fee and lower exit cost - those are other ways for the lender to cover the early repayment risk. It's up to the borrower to pick which way of paying for it they prefer - they have a free choice when they pick which mortgage to take. It sounds as though Paulxo chose the lower interest rate and arrangement fee, higher exit charge way of covering the risk and now dislikes the consequence of his choice. I have difficulty feeling sorry for him, since he's benefitted from lower interest rates or upfront charges than he'd have had if he'd chosen the other ways of covering this risk.

It is an interest rate option that is binding on both parties. If rates go up, the borrower benefits. If rates go down, the mortgage company benefits. Or would, except that customers would remortgage to avoid keeping to their side of the deal. The cost to leave the mortgage provides the incentive to keep to the agreed term even when rates decrease, just as the mortgage company must when they increase.

Those who remortgage when rates have risen are an added bit of profit to subsidise the rest of the borrowers. Part of the pricing calculation. But in this case there is an argument that the charge is a penalty fee because the lender may make a profit on the interest rate deals it made to fund the mortgage: this money can be re-lent at lower cost than arranging new money for a new mortgage for someone else. The problem is that this is part of the overall mortgage book written by the lender and this is part of the risk management for the whole book, not just for the single loan.

For an actuarial analysis of repayments and how to manage them from a mortgage lenders point of view, see A Study of Mortgage Repayment Risk (PDF). It suggests that lenders can use early repayent charges, higher initial charges or higher interest rates to cover the risk. As a prospective borrower, early repayment charges are best because that places most of the burden on those who do use the option to leave early, so others get the most competitive rate.

AndrewSmith

mountainofdebt wrote:

If this is the case then why isn't the 'penalty' that has to be paid fixed at the time that a person takes out the mortgage rather than the person having to pay the 'penalty' applicable when the mortgage is redeemed?

Thats a bit like saying why doesn't the traffic warden issue a ticket when you enter the town just in case you decide to park illegally?

The amount of 'penalty' is fixed at the time the mortgage is taken out but is only payable if the terms of the agrement are breached, ie when the mortgage is repaid within the set incentive period.

I think you are confusing early repayment or redemption charges with closing/deed release fees, the two are completely different. What is being discussed here are early redemption penalties charged for leaving the selected lender within an incentive period.

regularsaver1

Agree with posts above by AndrewSmith and jamesd. Sounds like the OP chose a low interest rate that had a high penalty.
They were looking at the rate and not the penalties attached and are now thinking of leaving early so have to pay the fee

Paulxo

This is going all over the place.

We need to make it clear what I am asking for here.

I'm not talking about an Early Repayment Charge. Or an admin fee to close the mortgage. I'm talking about the Redemption Penalty that exists in Fixed Rate mortgages. Are they legal?

But what about Early Repayment Charges? Are they legal also? They seem unfair too.