early redemption penalty

toonfish

jj_martinez wrote:

all i want to know is, what are these charges for, are they fair and are they legal?

they are a penalty because you did not stick to the conditions of the loan, the lender has to pay the rates on those funds that they lent you and yes, they are legal.

MarkyMarkD

jj_martinez wrote:

i also signed an agreement with the bank about my charges but i can claim them back, so why is it so diferent?

It's not so different, it's just that a politically-motivated FSA is choosing to have a go at some things but not others.

For the avoidance of doubt, I'm not saying that ERCs are illegal, but that (IMHO) the FSA's views on the illegality of bank charges are wrong.

And before people say that bank charges have been "proved illegal", they haven't. All that's happened is that the FSA has expressed an opinion and as they are the regulator for the banks, the banks don't have any choice other than to comply with it.

jantom_1

Does anyone know of a selfbuild mortgage company that does not charge huge set-up fee's and releases the money up-front in stages?

toonfish

jantom_1 wrote:

Does anyone know of a selfbuild mortgage company that does not charge huge set-up fee's and releases the money up-front in stages?

there are a few, available through Buildstore

KittyBoo_2

Andy, perhaps you should re-read the sentence at the top of this page that says "please be nice to all Moneysavers. There's no such thing as a stupid question and even if you disagree, courtesy helps"
We all start somewhere and should be encouraging members to ask whatever they want as long as it is relevant. There will be other members who are facing the same issue and would like to hear what others have to say. Come on - keep it open and friendly.

ohmsoft

The difference with ERCs is that they relate to specific mortgage products which are better than the standard rates. For mortgage lenders to justify the much lower profit margins (and remember they all do need to make money for shareholders/investors to stay in buisness) they need to be able to be certain of a level of commitment - where this is broke they must insist on an ERC.

All customers have the choice of non ERC carrying mortgages but it is evident that many chose otherwise in order to save money - so they can't be too bad...

Also worth noting that even certain CAT standard mortgages allow ERCs (with caviats) so they are not illegal (/unlawful).

The whole above said, like anything in life, if you don't ask you don't get, and some lenders will reduce ERCs to retain goodwill - but not often!

Oh and no, a perfectly reasonable question given the current climate, and welcome!

pjaj

They are a penalty because you did not stick to the conditions of the loan, the lender has to pay the rates on those funds that they lent you and yes, they are legal.

In the case of mortgage ERCs, the company is merely reclaiming the money they would have made from you if you had stayed with them for that period, therefore the charges are not 'punitive'.

All very well, but they've got ALL their money back, so they can immediately lend it again and earning the interest they supposedly lost. Therefore they are effectively getting twice the interest. It may be part of the contract, but it still smells of rip off.

In 1996 a friend of mine took out a mortgage with the NatWest. 3 years later he was made redundant and, due to ill health, took early retirement. He decided to pay off his mortgage and was charged about 5.0% of the outstanding balance as a "charge raised" on top of a "release fee" of £85. We are still trying to find the original mortgage contract in order to establish what deal he was on. However, this charge seems excessive to me.

MarkyMarkD

You aren't getting it, pjaj.

The lender is entitled to the profit they would have made from the first customer, whether or not that customer chooses to walk early.

The fact that they can lend "the money" to another customer and make the same profit is irrelevant - they'd have made that amount of profit as additional profit if they had made it as an additional loan.

Most lenders are not short of money to lend - they can easily enough get more in any case. What they are short of is customers to borrow from them.

Hence why ERCs based on loss of profit are quite reasonable.

dunstonh

A lot of lending to consumers, particulary fixed rates, is borrowed money. The days of savings accounts funding lending exclusively are long gone.

That involves costs and ties for the lender. So, when someone pulls out, its only fair the consumer is penalised.

In 1996 a friend of mine took out a mortgage with the NatWest. 3 years later he was made redundant and, due to ill health, took early retirement. He decided to pay off his mortgage and was charged about 5.0% of the outstanding balance as a "charge raised" on top of a "release fee" of £85. We are still trying to find the original mortgage contract in order to establish what deal he was on. However, this charge seems excessive to me.

Seems perfectly fine. If you repay the mortgage during a tie in period, you face the fixed penalties that were disclosed prior to you signing the contract.

pjaj

You aren't getting it, pjaj.

The lender is entitled to the profit they would have made from the first customer, whether or not that customer chooses to walk early.

Maybe I'm not getting it, but surely they make that profit in any case by re-lending the money. So they don't lose anything by the early payment.

The fact that they can lend "the money" to another customer and make the same profit is irrelevant - they'd have made that amount of profit as additional profit if they had made it as an additional loan.

No it isn't irrelevant, but your "additional loan" is. It would have to come from different money, money they would have to pay interest on themselves, borrowed from depositors or the money markets.

I think that my point is that the charge is pure extra profit at little or no cost to the lender. If he hadn't paid it off then they wouldn't have the charge or the original money to re-lend. And in this particular case they are making this profit at the expense of a semi-invalid who can ill afford it.