Mortgage Redemption Penalties - Lawful or Not ??

GunJack

Apologies if this has been asked before, but here goes...

Under English contract law, penalty charges are not allowed, but does this apply to redemption penalties on repaying mortgages early, for example, during a fixed rate period ??

If the lending institute have raised the funds it lends to you, assuming on a lower rate than they charge you, they are making profit. Therefore what is the justification for the very big penalties they charge the customer ??

Any definitive help appreciated....

BettyB_3

As you stated penalty charges are not allowed. The mortgage lender is entitled to recover their costs and no more. Consumer Corner members have successfully reclaimed large proportions of these charges.

Lizzy

Well have a look at this GunJack

http://forums.moneysavingexpert.com/showthread.html?t=301846

I think you will need the advice of the Consumer Action Group if you decide to go ahead.

Lizzy

Ian_W

3 pages of arguments pro and anti at:
http://forums.moneysavingexpert.com/showthread.html?t=301846

My personal view - not expressed on the other thread is that if the penalty is expressed up front - which it is - why did you sign it if you weren't prepared to abide by it?

If the lender said to you, sorry we no longer wish to give you this cheaper rate as int rates have risen, so despite being in a fixed rate period we are going to increase the rate you'd soon be off to Mssrs Sue, Grabit and Run and rightly so.

There again I didn't know that English contract law prohibits penalty clauses, strange when I've seen them in contracts involving builders, so what do I know!

dwight-van-man

Just out of curiosity - if all mortgages were free of penalties and charges, how much interest do you think you would be paying? You certainly wouldnt be able to get deals at the rates currently available. So whats the better scenario - either every mortgage customer of every bank pays a far higher rate, most likely on a variable basis, but is free of any penalties to leave etc, or the current situation?

dwight-van-man

In open response to the PM's I've received directing me to the Consumer Action Group site (thanks btw), the point of my earlier post was not to dispute that ERC's are being challenged. I am just curious about what people think the end effect will be of challenging every fee and charge lenders make. The range of deals that are available at the moment are priced according to the arrangement fees, product fees, exit fees charged and presumably on an assumed level of erc income. Rightly or not, this means that as a consumer we have the choice of nice cheap fixed rates. If widespread consumer pressure results in lenders stopping making these charges, they are going to look to the rate for their profit margin, the likelihood being that SVR will be the norm and if you want a fixed rate, it'll be risk priced at an even higher level.

All I was asking, in the spirit of open debate, is which is the lesser of the two evils?

AndrewSmith

Without ERC's we will see an inevitable rise in interest rates across the board.

All it will achieve is making it more expensive for everyone to buy a home thus moving property further out of reach of first time buyers.

regularsaver1

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

Should the lender not charge an early repayment charge should a borrower wish to come out of this 15 year fixed rate thatis mentioned above?

GunJack

Thanks for all the responses on this. I am coming from the angle of: you take out a mortgage, expecting to be in an area for a number of years, then, unbeknown to you, your work suddenly come up with a plan to relocate you to another area. You took the mortgage in good faith, but now have the redemption penalty hanging over you.

I am a Civil Servant, and what with the Lyons report being actioned (moving loads of CS out of the "South East", although my location is not really in the bounds of that, being in East Anglia), I now have the very real threat of being forced to move. However, if I have to cough up the ERP, that'll leave a major dent in my having a reasonable deposit for a house in my new location. The no penalties under English Law I know from work, as none of our contracts are allowed to have them, so how do the mortgage lenders get away with it ??

dwsjarcmcd

GunJack wrote:

Thanks for all the responses on this. I am coming from the angle of: you take out a mortgage, expecting to be in an area for a number of years, then, unbeknown to you, your work suddenly come up with a plan to relocate you to another area. You took the mortgage in good faith, but now have the redemption penalty hanging over you.

I am a Civil Servant, and what with the Lyons report being actioned (moving loads of CS out of the "South East", although my location is not really in the bounds of that, being in East Anglia), I now have the very real threat of being forced to move. However, if I have to cough up the ERP, that'll leave a major dent in my having a reasonable deposit for a house in my new location. The no penalties under English Law I know from work, as none of our contracts are allowed to have them, so how do the mortgage lenders get away with it ??

Because they (the lenders) don't classify them as 'penalties' but 'charges' covering the cost of providing you with a preferential rate, which is allowed by law.
Is it your lenders fault you may have to relocate? Of course not, so why do you expect them to subsidise you for this?

GunJack

It's not that I expect them to subsidise my relocation, it's just that the relocation issue sent me off on the road to looking at my potential costs involved. What with all the other threads about bank charges being deemed unlawful, credit card charges deemed unlawful and god knows what other charges being deemed unlawful, I would have thought ERC would have come under the same type of ruling. Oh well, back to the drawing board........