Redemption Penalty - Are They Legal???

AndrewSmith

Paulxo,

I am referring to exactly what you are asking about in both my above posts.

The replies I give in the posts are related directly to your question.

Andy

Leon_W

Early Repayment Charge and Redemption Penalty are one and the same thing just by a different name.

They are always notified now as Early Repayment Charges (or ERCs) on KFIs.

They are commonly found on Fixed Rate Deals and are part of the legal contract between you and the lender. They are therefore legal and enforceable.

It would be pretty pointless lenders offering fixed rate deals if for whatever reason the interest rate fell then those customers would just switch to a cheaper product. The Early Repayment Charge acts as a discouragement to do so.

dougk_2

I was just about to say the same Leon W.

The point is YOU agree to these charges when you take out the mortgage if you don't agree , don't take out the mortgage.

The redemption charge is there to stop you redeming the mortgage early without paying a penalty for the special rates agreed - Sounds like you want the benefit of low or fixed guarantees without commitment from you.

jamesd

Paulxo, the law is that penalties are not legal but actual costs are legal. See A Study of Mortgage Repayment Risk which clearly illustrates that these are generally a cost, and hence legal.

You could try challenging it on the grounds that if rates are higher, the mortgage company can make more money relending the money provided for you. The arguments against you there are the fact that it is a whole collection of loans that must be balanced and this is a simple system to explain and administer and reduces overall costs. Whether that will be sufficient to defeat your argument is not knowable until you try.

I suggest that you cite the study to the mortgage company as showing that they make money on the interest rate difference because rates are higher now, so they should not be charging you the full amount.

Beyond that, it's simply undecided in the courts and you must judge for yourself whether you think they are legal or not.

Personally, it's my view that when rates have risen, most of the charge should not be made, because it is needed mainly to prevent people from switching to lower rates, which does clearly cost the company money they are entitled to recover.

Lizzy

Hi I have been asked to pop in on this as someone who is claiming the charge back.

As furndire says if you sign in to CAG you will be able to read the success stories about ERCs. It is entirely up to the individual if you want to do it or even believe it. It has been done several times to my knowledge.

The claim is that they have to show their losses, if they have not lost by anyone redeeming their mortgage how can they charge it. When asked they say that it is a secret (well tell it to the judge)

Have a look at this from the Office Of Fair Trading


"A term in a mortgage agreement which requires the borrower to pay more for breaching the contract terms than actual costs and losses caused to the lender by the breach (or a genuine pre-estimate of that) is likely to be regarded as an unfair penalty and to be unenforceable both at common law and (in a consumer mortgage) under the Unfair Terms in Consumer Contracts Regulations. A redemption charge may be regarded as a penalty even if it is expressed as the price for exercising a right rather than a consequence of breaking the agreement."


Also someone has posted on here that they only had 5 weeks to go and incurred a charge. So how can a penalty of say £6000 after 1 year be £6000 with 5 weeks to go ????

Let them prove it..............they can't. The OFT think it is wrong.

The ground for reclaiming it not well worn at the moment but a nice path is forming.

Someone on here wants 12k back from an ERC I'm really sure they don't care that someone thinks they should'nt.

Perhaps those brokers might just lose their fees.

Good luck everyone

Lizzy

jamesd

Lizzy, see the actuarial study I referenced, which uses data from Abbey, A&L, HBOS, Barclays, Bradford & Bingley and Nationwide to show that there is a loss when rates have decreased and provides a pre-estimate of those losses in various interest rate change situations. The study found that the costs were as follows, expressed as a percentage of the amount borrowed on all fixed rate loans:

Immediate 1% interest rate fall: 0.6%
Immediate 2% interest rate fall: 1.9%
2% fall in 2 years: 0.7%

These are the percentages of the money borrowed that all borrowers would need to pay up front to reimburse the lender for its losses. And since they would have to be paid up front, they would end up paying them even if the rates rose.

Do you really want everyone to pay an extra, 0.7% at the time they take out a fixed rate mortgage, just in case they want to move and rates have fallen by 2% 2 years later?

The study also found that "a charging structure under which customers who prepay are charged 1% per annum of the original balance for each year of the fix outstanding. As Table 3 shows, for the sample portfolio, a 1% per annum charge neutralises the effect on prepayment behaviour of a 1% interest rate incentive [drop]."

This factors in the disincentive to change from an early repayment charge, instead of just accepting that people change. So, we have a study showing that a charge of 1% a year for each year remaining will cover the losses from a 1% interest rate rise. That's 3% in the first year of a 3 year deal. But rates can rise by more than 1% and the lenders have to cover that as well, so they can readily use predictions of possible interest rate changes during the life of a mortgage to justify substantially higher early repayment charges than 3% in the first year or 1% in the last.

Was that quote from the OFT specifically about the charges for changing a fixed rate mortgage?

You seem to be mistakenly assuming that all consumers gain from this. They don't. There are real costs for arranging a fixed rate mortgage if rates fall and the mortgage companies have to pay those costs somehow. If they can't do it with charges to recoup their losses when someone switches mortgage, they have to do it with higher arrangement fees and interest rates. Trying to bar them from offering cheaper deals without this option hurts the consumers who don't move, particularly if rates rise.

There is one thing that mortgage lenders could do without hurting those who don't move too much: they could make it cheaper to leave if rates rise, but not if they fall.

regularsaver1

Sounds like they want the lower rate and have the cake at the same time

you get the lower rate should you agree to the peanlty to leave early

Lizzy

Hi Jamesd

During my claiming process my old mortgage company has had many chances to Prove their losses. They have declined my offer and in one letter admitted it was a penalty. The banks etc are NOT ALLOWED TO PROFIT FROM THIS. They are only allowed to cover their ACTUAL LOSSES. So in that I think we agree the bank should be allowed to recoup their actual losses.

So why don't they write to me explaining their acutal losses in my case. They know what the rate was when I took it out, they know all the rates inbetween and they know the end rate. They have all the information to work out my case.

It seems in their letter to me that this information is confidential. Why not tell me now, why wait until court to explain it to me. I can't see the judge being too pleased with that.

I don't know about the OFT report only being for fixed rates. From my experience they are usually the ones subject to a ERC but I can't be sure.

It is just one of those things, some people agree with the penalty some people don't. I agree with paying their losses, I don't agree with them profiting from it. As they are starting to pay out they must have something to hide.

Lizzy

regularsaver1

Lizzy - "have had Mortgage charges back from Birmingham Midshires and will be sending them court papers for an Early Redemption Penalty shortly.
I have also had (unjust) defaults removed from my credit file in 9 days."

why would you have mortgage charges back unless you defaulted. Birmingham midshires often help people who can't get a mainstream mortgage - so an early repayment charge is understandable as they have a higher risk. Was this the case with you?

Lizzy

No the mortgage was 2 payments late and they defaulted me. I believe that credit agreements are usually 8 payments before default. Thats why it was swiftly removed no doubt with legal action pending on them.

My mortgage was for self cert not bad credit so I suppose thats not mainstream. Over the last 17 years of course we have had late payments. I don't disagree with that at all thats life. So there we go all charges back, default removed and now ERC pending. Cool.