Redemption Penalty - Are They Legal???

regularsaver1

HSBCrusher wrote:

Is it?

The fees do not just cover costs, they make the bank profit.

Make profit out of those who can least afford it.

Higher Risk is what I meant before

and if entering a fixed rate for 5 years, then 5 years means 5 years and not 3 years! People change their mind does not merit the ERC not being charged

tamadus

jamesd wrote:

tamadus, you can identify the mortgage brokers by their signatures. They are required to use them. No signature = consumer, or at least not broker.

Please read A Study of Mortgage Repayment Risk (PDF) and tell me how you think the mortgage lenders offering fixed rates should cover their risk for offering a fixed rate mortgage, the one consumers who take a fixed rate mortgage are passing on to them to manage, so the consumer doesn't have to accept the chance of a large increase in monthly payments.

The reason I'm asking you to do this is that at present you don't appear to be distinguishing between unlawful charges and the costs of having an uncovered interest rate futures arrangement when the other part of the deal - the consumer - walks away.

If you want to see what the basic cost of a mortgage is, take a look at the lifetime tracker rates. There's no messing about with interest rate futures or low start (discounted initial) monthly payments in them, just the plain mortgage contract.

milletme, yours is a good example of a charge which appears to be partly unlawful, because the loss to the lender does depend on the time you've had the mortgage. Chances are that only about 1/2 or 2/3 of that really reflected their loss if it was a fixed rate deal. One lender recently changed from stepped rates - decreasing each year - to the same rate for all years, less than it had been in the first year, more in the last. Their argument was that it was simpler to understand. Maybe. But it was also unwise, I think, because it creates situations where it's obviously wrong. I don't recall any of the brokers who commented on it thinking it was a good idea.

jamesd, I have read that several times. Simple fact is the charges for early redemption fall under sec.4 of the UTC in that the expect the consumer to cover any possible loss made through a business decision that the consumer has no say about. Their decision is a considered business risk they undertake and they can't expect the consumer to underwrite their possible losses. If they choose to make a mortgage offer based on a calculated risk and it goes wrong for them why should the consumer be expected to pay. The Courts have already ruled on sec.4 of the UTC several times.

The argument for stepped rates works in reverse, as the charge should increase to cover extra interest the longer the arrangement is in place, again the courts have already made decisions to that effect. That is why the lender you refer to abandoned them as they realised a court would judge against them.

Simple fact is the same arguments have been used by the banks already. 'If we dont have penalties then everyone pays' scaremongering is rife. The banks and building societies will do whatever they can to increase profits at the consumers expense, even though that will create severe hardship and record bankruptcies. Even now they are complaining about IVA's and yet who created the situation of high house prices and easy credit? Now we have 50 year mortgages where the consumer is going to be paying interest for the rest of their lives.

Bottom line is that the courts have the final say and if the decree ERC's and penalty charges unlawful then we have to accept it and so do the loan companies.

People are making claims and the companies are paying out rather than go into a court because they know they will lose. If they are so convinced why don't they take their highly paid legal teams into a court and prove their case ?

jamesd

tamadus wrote:

The argument for stepped rates works in reverse, as the charge should increase to cover extra interest the longer the arrangement is in place, again the courts have already made decisions to that effect. That is why the lender you refer to abandoned them as they realised a court would judge against them.

Remember that the exit cost for a fixed rate mortgage is not an interest charge. It's a cost of the futures contracts taken out at the start of the mortgage. The longer you hold the mortgage, the more of that cost you've paid. That's why the outstanding cost decreases over time.

Interest rates play two roles:

1. The expected risk of higher rates affects how much provision the mortgage company has to allow for and decides how much it'll buy in the way of options. That in turn affects what it'll charge for initial setup, interest rate and exit cost. It can apportion the cost between those in a wide range of ways.

2. Then, while the mortgage is in force, the interest rates affect whether it did or didn't buy enough cover and who ends up ahead, the consumer or the mortgage company.

But nowhere in this is the consumer being asked to pay for the actual interest difference. In the exit cost the consumer is being asked to pay for the remaining cost of the futures taken out when they took out the mortgage.

This cost is also why consumers who take fixed rate mortgages for the whole duration of their mortgage end up paying more than consumers who use variable rate mortgages instead. The variable rate consumers aren't continually paying for those interest rate futures deals.

Paulxo

HI folks

Awesome debate we're having on this thread, I didn't realise I'd stir up a hornet's nest like this.

Well, my mortgage lasts until mar 08 and with planning on selling in the next few months, I had to know whether I could reclaim my redemption fee. Obviously some people think that it is a fair cost, but I tend to agree more with the assertion that if a mortgage company gives a fixed rate there shouldn't be a massive penalty for your deciding to leave it. It is their risk. Plus, with rates increasing they'll be able to relend the money at a higher rate anyway. It seems they want their cake and eat it.

I'm planning and hoping to sell my house in dec 07 and as a result this would mean that it would be a few months before the expiry date. AT this stage I don't believe it costs my mortgage company £5k or they lose out in profits to that extent with only 3 payments remaining.

So if I do sell my house then I will be definitely applying for them back.

By that time of course, everyone will be doing it.

My BS called me today to ask if I wanted to remortgage and I explained about how I was tied in. The advisor suggested I wait til the period is up. Can you believe that? I told him i was confident I'd get my fees back, but he didn't want to go there!

I think the brokers have to accept reality - people are claiming, and winning.

Thanks for all your comments guys.

jamesd

Paulxo wrote:

If a mortgage company gives a fixed rate there shouldn't be a massive penalty for your deciding to leave it. It is their risk. Plus, with rates increasing they'll be able to relend the money at a higher rate anyway.

It's a lot of money so it's no surprise that people who have paid it don't like it.

There is risk but the core of it is the cost they have of fixing the rate paid for the money so they reduce the risk. If you'd like to try for an amount of money that it seems very likely you should be able to get, you might try the following calculation:

cost to leave in year 1
x (total months - months remaining)
/ total months
+ some allowance for their new customer acquisition cost

With this calculation you've clearly allowed for their legitimate costs in the futures deals and replacing you as a customer early, so it should be hard for them to mount a viable defence.

regularsaver1

You've said yourself about selling - so is your existing mortgage portable to a new property, thereby possibly saving you the early repayment charges?

you have chosen to move, breaking the fixed rate deal conditions - if it is portable they will move the fixed rate to a new property depending on application ect

why are you blaming the brokers!?

regularsaver1

it is also like this post - mentioning a fixed rate for 15 years.

someone might go for it now and then decide to get out after say 8 years - there is a early repayment charge, and why should they not charge it?

http://forums.moneysavingexpert.com/showthread.html?t=311030

AndrewSmith

Paulxo wrote:

I think the brokers have to accept reality - people are claiming, and winning.

Nothing to do with brokers. We have nothing to accept.

It is the lenders who set the penalties, charge them, administer them and will ultimately have to repay them if the claims are successful.

Whether there are redemption penalties or not it has no bearing on the role of a broker. We are unaffected by it.

andyinlondon

Given the attitude of the brokers on this thread, I will never go to a broker for any financial product ever again.
Insurance, mortgage, investments …… nothing.

I would rather go without than ever give a broker a single penny of my money.

And yes I have just redeemed my mortgage and I had to pay an ERP on it.

And of course I will be claiming it back along with all the other unlawful charges that the lender applied to my account.

I do not like to be ripped off,

That’s why I am a member of MSE !

dwsjarcmcd

andyinlondon wrote:

Given the attitude of the brokers on this thread, I will never go to a broker for any financial product ever again.
Insurance, mortgage, investments …… nothing.

I would rather go without than ever give a broker a single penny of my money.

And yes I have just redeemed my mortgage and I had to pay an ERP on it.

And of course I will be claiming it back along with all the other unlawful charges that the lender applied to my account.

I do not like to be ripped off,

That’s why I am a member of MSE !

I am not a broker and fail to see your corrollation with them and being ripped off. They (and others, including myself in other threads) have just put an opinion that these charges are not unlawful. If ERC do go, this would have not impact on why people would use the services of a broker or not.

No one likes being ripped off but your target here (brokers)is just wrong. Was it a brokers fault you had to pay an ERC?