Early Redemption Fee

ezra1973

I took out a 3yr fixed rate deal starting on 1st June 2008. Monthly fixed payments have been made on 1st each month since then with the last payment to be made on 1st May.

On taking out the mortgage I was informed that there was an early redemption fee of 2% of the remaining full balance of the mortgage.

I am now in the process of selling the property and will probably complete mid May - after my last payment. I have contacted my lender and they have stated that if i complete before 1st June I will be charged the full 2% redemption fee which equates to nearly £4,000. I pointed out that i will have paid the 36 individual payments to compete the 3yr deal and that no more monies will remain outstanding after 1st May date, they are insistent that the fee is still charged.

The easy answer is to push completion back a few weeks - but i have already done this to try to move it passed 1st May and dont want to further risk the sale.

Whilst their point that this is a 3yr deal and 'not a 2yr 2months and 1day deal' i don't understand how they can charge the redemption fee when there is no money outstanding and they can not demonstrate a loss.

Help / advice please.

kingstreet

What is the wording on your mortgage offer?

Does it read "fixed for thirty six monthly payments" or "fixed until 1/6/2011" or "fixed until three years from completion?"

Thrugelmir

ezra1973 wrote: »

I took out a 3yr fixed rate deal starting on 1st June 2008. Monthly fixed payments have been made on 1st each month since then with the last payment to be made on 1st May.

You took out a 3 year deal commencing on 1st June 2008. So that means the fixed term ends on the 31st May 2011.

The number of payments you have made is of no relevance. As its the rate of interest that you fixed on your mortgage by opting for the product.

noodle

This is a tough one - the fee is obviously disproportionate to any cost to the bank of your early redemption. If they kept your sale proceeds until the end of the month as security, and let the mortgage loan run on, they'd be no worse off than now - but you'd pay a month's interest which, presumably, would be much less than the fee. I'm guessing they don't have that as an option?

The terms of the loan seem pretty clear - your tie ends on 31st May. Unless there's any basis for arguing that the term is unfair as it's a penalty with no commercial grounding (and I would assume someone has been there before and, judging by the presence of the clause, gotten no joy) then you're stuck.

I'd advise talking to someone at the bank, who has some autonomy, and trying to come to a compromise. Tell them that you don't want to have to delay the sale until 31st May, but will do unless you can agree some relief from the fee. I've never tried to have such a discussion with someone at a bank.. so I've no idea if you've got any hope.. but, commercially speaking, and assuming that you can and will delay the completion if needed, the bank will be better off charging you - say - your months interest (which is sunk to you regardless) plus anything additional they can get out of you.

KarenBB

With our mortgage taken out 3rd of month our fixed was for 60 months, the first month was counted as that month was just charged as residulal interest so interest for the month of completion, we then had 60 months at the fixed rate so in effect the fixed rate started on the 1st day of the month after we moved in but they charged the same fixed rate for the part month too. Hope that made sense. Your mortgage was probably done the same but if it started on the 1st of the month I think that you should have grounds to say you've had the full 36 months as at the 30th April, maybe you should try speaking to someone mre senior and going to complaint if need be. Good luck with the move

opinions4u

noodle wrote: »

This is a tough one - the fee is obviously disproportionate to any cost to the bank of your early redemption.

Is it?

Please explain how you know so much about the lender's hedging position and wholesale funding arrangements for this specific tranche of lent mortgage funds. Do you know how much it will cost the bank to unwind the hedge on this deal?

If they kept your sale proceeds until the end of the month as security, and let the mortgage loan run on, they'd be no worse off than now

Again, can you prove this? You have absolutely no idea what costs there are behind the scenes that were involved in raising the originial funds to lend on.

The terms of the loan seem pretty clear - your tie ends on 31st May. Unless there's any basis for arguing that the term is unfair as it's a penalty with no commercial grounding (and I would assume someone has been there before and, judging by the presence of the clause, gotten no joy) then you're stuck.

The OP won't make progress at the FOS as the term was clear at the outset.

noodle

opinions4u wrote: »

Is it?

Please explain how you know so much about the lender's hedging position and wholesale funding arrangements for this specific tranche of lent mortgage funds. Do you know how much it will cost the bank to unwind the hedge on this deal?

Yes it is. They don't need to unwind the hedge - they can let it run down and they are no worse off - assuming that the OP pays the final months interest.

I know that banks are big and complex and won't just go around tinkering with deals in that manner. I'm merely pointing out that if there was a will there would be a way.

Some banks have ERC's which reduce over the term of the deal, so that the penalty is proportionate to the unexpired period of the hedge. This one doesn't, which is their right.. and the OP signed up for that. Fair enough.

I'm going to go out on a limb and assume that, irrespective of what fee the OP pays, the bank will choose the most profitable route it has available to unwind the hedge.. including, if applicable, not unwinding it.

The OP won't make progress at the FOS as the term was clear at the outset.

Quite possibly. But.. nothing ventured, nothing gained.

Engeroosi

speak to the buyer of your property, maybe off discount to delay, saves you both money and everuone is happy!!!

magpiecottage

opinions4u wrote: »

The OP won't make progress at the FOS as the term was clear at the outset.

I disagree - FOS will look at what is fair and reasonable in the first place.

Almost certainly if the lender has received all the interest that the borrower contracted to pay within the fixed rate period the lender will not have lost out (and possibly gained as they have the use of it for a week or two more than they expected. Therefore any additional amount would constitute a penalty.

I would anticipate a complaint being upheld. However, if the OP raises it with the lender now it is unlikely to get that far.

opinions4u

magpiecottage wrote: »

I disagree - FOS will look at what is fair and reasonable in the first place.

Almost certainly if the lender has received all the interest that the borrower contracted to pay within the fixed rate period the lender will not have lost out (and possibly gained as they have the use of it for a week or two more than they expected. Therefore any additional amount would constitute a penalty.

I would anticipate a complaint being upheld. However, if the OP raises it with the lender now it is unlikely to get that far.

I usually agree with your posts and would expect your knowledge of the FOS to exceed mine.

But the price of the the product will have been set taking into account ERC clauses. 2% is not unfair or excessive and I really cannot see the FOS ruling that it is.

reformedEffortmaker

Engeroosi wrote: »

speak to the buyer of your property, maybe off discount to delay, saves you both money and everuone is happy!!!

Good to see some practical, realistic advice!

OP, I had the same issue 3 years ago, I solved it in the way that has been suggested above. I offered to reduce the price to the seller by another £3k if he waited another 8 weeks to complete.

The figure you agree on is up to you, obviously it has to be less than the ERC penalty to make it worth it, but it's worth a try?