Redemption penalties

adelene

Hi,
I am just wondering if there is anything I can do at all about the redemption penalties on my mortgage. My husband and I took out a 3 year fixed-rate mortgage with Cheltenham & Gloucester almost 2 years ago. He is a teacher and I am finishing a PhD, and I have been offered a fantastic job in Cambridge starting in October (when I finish my course), which I could not refuse. My income will double. So we decided to relocate to Cambridge and my husband found a new job as a teacher in the area, which also involves a promotion and a pay rise from his current role. This was an unexpected situation but we felt confident that we would not have to pay a redemption penalty as we hoped to stay with C&G for the new mortgage.

When we went to rearrange the mortgage with the bank, the mortgage advisor told us that our credit checks and financial history were all fine, and that we would be able to have the amount we were asking for. We weren't sure how soon we were moving, though, as we hadn't sold our own house, and she said that if we wanted it for any period of time longer than three months away she would refer it to the underwriters, which she did. We felt happy and safe to continue to market our property and find a new house in Cambridge. We subsequently sold our house and put in an offer on a new one.

Three weeks after our meeting the bank phoned to say that it was company policy not to offer mortgages on prospective incomes rather than actual incomes, even though we had made it absolutely clear that it was on this basis that we were applying for a mortgage and the initial advisor had raised no problems at all with this. The bank said it would not offer us a mortgage until we were closer to relocation and the new jobs (which start in Sept and Oct).

We feel that we were misadvised in the first instance and pushed into a situation in which we have sold our flat in a timescale that means we have to leave our existing mortgage and not take up another with C&G, meaning that we have to pay their redemption penalty of nearly 3000 - almost the same amount we have paid off the mortgage in the two years. We can't pull out of the sale of our flat because we can't risk still owning our house when we live in Cambridge. We have found another mortgage with Accord but we would have much preferred to stay with C&G.

To add insult to injury, when I wrote a letter to complain about this and ask for the penalty to be waived, C&G said that we would always have been charged the penalty because we now need a 100% mortgage, which is a different product to the mortgage we now have. We were never advised of this during the process. And it seems completely ridiculous that even if you stay with a bank but take out a different product, they still charge you.

I feel that redemption penalties on mortgages are completely unfair. I know we knew about the penalty when we took out the mortgage, but of course circumstances in life change and make fixed time periods difficult to predict. Surely it has cost C&G more money in the long run by losing us as a customer than by helping us with our situation. We understand that they can't offer us a mortgage until nearer the time of our new incomes, but they should have told us this up front, as it is company policy, and they should waive all penalties if you take out another mortgage with them, whatever 'product' it is.

Does anybody have any advice? Or similar experiences? Am I right in thinking that redemption penalties are just a ridiculous means of banks claiming back all the equity you have put into a property in the first few years of a mortgage?

Adelene

dunstonh

To add insult to injury, when I wrote a letter to complain about this and ask for the penalty to be waived, C&G said that we would always have been charged the penalty because we now need a 100% mortgage, which is a different product to the mortgage we now have.

That is correct.

And it seems completely ridiculous that even if you stay with a bank but take out a different product, they still charge you

No it doesnt. 2 years ago you asked for a low fixed rate which was cheaper than the variable rate. The bank would have had to go to the money markets to offer that deal and would have incurred costs and liability themselves for it. If you dont stick with the deal, the bank loses out so to cover themselves they put a penalty in place which you are fully aware of before you sign the contract letter. Even your solicitor would pointed it out to you.

Think about if there was no tie in. You could take a 3% cashback and then 2 months later switch to a discount and then a fixed rate, but then a better fixed rate comes along and you could move to that. Who is going to cover all those costs?

I feel that redemption penalties on mortgages are completely unfair. I know we knew about the penalty when we took out the mortgage, but of course circumstances in life change and make fixed time periods difficult to predict.

If you think they are unfair, then why did you go with a product that has an early redemption penalty? You didnt have to. It was your choice.

Surely it has cost C&G more money in the long run by losing us as a customer than by helping us with our situation.

Last I knew, C&G didnt offer 100% mortgages (not that I have looked recently). So they had lost you anyway. Plus there is no loyalty with consumers and the market is priced with that in mind.

We understand that they can't offer us a mortgage until nearer the time of our new incomes, but they should have told us this up front, as it is company policy, and they should waive all penalties if you take out another mortgage with them, whatever 'product' it is.

Tough. You chose the contract. You have had two years of benefit and now you are asking to break the contract.

Am I right in thinking that redemption penalties are just a ridiculous means of banks claiming back all the equity you have put into a property in the first few years of a mortgage?

Early redemption charges are totally valid and not a means to make money. They are there to protect the bank against loss.

homer_j_3

c&g do a 100% mortgage now but I agree with dunston on what he has said but that said, I share the frustrations of the OP as they clearly made decisions based on the information provided to them.

Unfortunately they Ombudsman cannot comment on the commercial desicions made by the bank so I am not sure how far an official complaint would go. It may be worth standing your ground with your complaint - they may compromise a little if you are persistent.

jamesd

This reply assumes that you have a fixed rate mortgage, not a discount or cashback mortgage. The arguments only apply to the fixed rate case.

Note that you have acted based on their initial advice and that you are now bound to sell your property when you would not have been had they provided you the correct information initially.

C&G secured the funds for three years at a rate below current rates, meaning that the funds can be relent at a higher profit today than would be the case if the mortgage continues.

Remind them that in law a penalty for breach of a contract may only reflect the actual loss incurred and ask them to explain to you how charging the full penalty is an accurate reflection of the loss they will suffer due to your breach of the contract. Note that in law a contract term which is a penalty fee in disguise will still be treated as a penalty fee.

Note that the consequence of their incorrect advice is that they will both make a higher interest rate margin on the relending and are now seeking to treat that higher profit margin as a loss by charging you a penalty charge. Note that it is clearly wrong to reward them twice for a failure to give you correct information.

Propose that in light of their error which has caused you to become tied into leaving when you could have avoided it and their inability to prove a significant loss that they accept pro-rata reduction of the penalty based on the term for which the mortgage has run so far.

They will probably reply that this is not a breach of contract by you but you exercising an option to end the contract early. They may accept the proposed reduction to avoid referring the case for a decision by the Ombudsman.

Don't go to anything other than the small claims route after the ombudsman because you'll need a precedent-setting decision and you haven't defaulted on your mortgage payments through no fault of your own, which is what is required to make a truly good test case in this area.

dunstonh wrote: »

2 years ago you asked for a low fixed rate which was cheaper than the variable rate. The bank would have had to go to the money markets to offer that deal and would have incurred costs and liability themselves for it. If you dont stick with the deal, the bank loses out

Please explain why you believe that it is not today possible to profitably relend money secured at interest rates from two years ago. It seems likely that there would be no shortage of borrowers who would be happy to relieve the C&G of their "loss" by accepting the money at the interest rates prevailing two years ago.

What has actually happened is that the C&G stands to make a profit from this situation, since it will be able to relend the money at a higher interest rate margin than is currently being earned on the money.

Had interest rates fallen in the interim the situation would be quite different and there would be clear merit to the argument that C&G would suffer some loss.

dunstonh

Please explain why you believe that it is not today possible to profitably relend money secured at interest rates from two years ago. It seems likely that there would be no shortage of borrowers who would be happy to relieve the C&G of their "loss" by accepting the money at the interest rates prevailing two years ago.

It's too small scale to make a difference. They cannot use early redemptions in their business plan for setting rates as they dont know who will or will not redeem the mortgage. Plus, it is 2 years into a 3 year. That doesn't leave very long left to pass the benefit onto someone else.

What has actually happened is that the C&G stands to make a profit from this situation, since it will be able to relend the money at a higher interest rate margin than is currently being earned on the money.

They borrowed the money themselves at a rate that works for them if the mortgage holder pays their interest. If the mortgage is redeemed early, they are not getting the interest any more but are still paying it themselves. They could lose out 6-12 months interest in this.

Note that you have acted based on their initial advice and that you are now bound to sell your property when you would not have been had they provided you the correct information initially.

Is there any evidence of the advice that was given?

The FOS dont have to force C&G to lend anything and if they are not prepared to do so, then the charges would have been levied regardless. Would an individual really not take on a new job and relocation over a small £3000 penalty? You would have to convince the FOS that would be the case.

I stuck a complaint once in for someone that based their retirement move from London to Norfolk on the info they had been told by the pension company. The values turned out to be wrong (significantly lower). The FOS rejected the complaint.

The thing is that the underwriting dept of the bank seems to have overuled the bank clerk which they are allowed to do. All they had was a decision in principle but that is not a contract.

You shouldnt commit yourself to anything until you know you have got the mortgage and that only happens after the application has gone through underwriting process and a valuation instructed.

devils_advocate

jamesd wrote: »

Please explain why you believe that it is not today possible to profitably relend money secured at interest rates from two years ago. It seems likely that there would be no shortage of borrowers who would be happy to relieve the C&G of their "loss" by accepting the money at the interest rates prevailing two years ago.

What has actually happened is that the C&G stands to make a profit from this situation, since it will be able to relend the money at a higher interest rate margin than is currently being earned on the money.

Had interest rates fallen in the interim the situation would be quite different and there would be clear merit to the argument that C&G would suffer some loss.

What you say is quite true, on the face of it. However, you dont know how the C&G structured this particular part of their mortgage book. For example, it could be that they have to pay a penalty to someone they sold the book to, in which case they are quite entitled to charge the borrower a fee, and if sued in court can justify the fee as a cost to them.

jamesd

devils advocate, agreed. That's a case where there could be a loss even in a rising rate situation.

dunstonh

We have to remember that this is not an admin fee like bank charges which is being challenged. This is a fee built into the costing of the mortgage product. It exists to allow them to offer that deal from the start.

It is totally justifiable as it was known about from the start and hasnt changed from the amount put on the contract. If held until tie in finishes, the borrower has benefited from better terms than the standard variable rate that had no penalty tie in period. It is one of the gambles you take when you go with a tie in period. The solicitor would have pointed this out as well when the contracts were signed so it's something you can say is unfair.

firesidemaid

it would not harm to write again to say you are not happy with the decision and that you were misadvised. there will be a complaints procedure - did they issue you with a copy of this, with all the stages?

with my own bank, i know that a complaint can be looked at 3 times within that company before you may need to refer it to the ombudsman.

from a customer (and non-expert) point of view, i too would feel that this penalty has been incurred by the incorrect advice you were given by their advisors.

adelene

Thanks for your advice everybody - that's really helpful. I don't think dunstonh needs to be quite so patronising - I completely understand the product and I understand that if we leave our mortgage early we have to pay and I have absolutely no problem with that. But we would not have left it early if we had not been initially misadvised - we would have stayed with C&G. There is evidence that we were misadvised because the C&G adviser was actually working very hard on our behalf to get us a mortgage when in fact, there was no possibility that C&G would offer us one because of company policy. Everybody else - thank you for thinking the problem through. I will take your ideas on board.
I think people should be able to ask questions on this site without being made to feel stupid.

KTF

adelene wrote: »

I think people should be able to ask questions on this site without being made to feel stupid.

Its not a case of people being made to feel stupid but with all the hype thats been whipped up about claiming back bank charges and the difference between mortgage exit fees, some people are now thinking (or maybe getting confused) that they can claim back other charges as well.

There have been a few threads about claiming back redemption penalties, etc recently and each time the answer is the same.

dunstonh is normally one of the first people to reply to questions like this and I suspect he is getting a bit weary of typing the same thing out again and again.