ERCs- Early Repayment Charges - early exit fees. (merged).

Mortgagehero

The moral to this story is "Always read the small print!".

lotto-dreamer

Mortgagehero wrote: »

The moral to this story is "Always read the small print!".

I loved this quote I saw somewhere on these forums

"The big print giveth .... the small print taketh away"

so true

samizdat

The fact that one signs a contract does not mean that certain terms of a contract cannot be judged to be unfair. Imperfect competition in a market may result in unfair terms being widespread, reducing choice for consumers. It is perfectly legitimate to criticise these terms even if one has agreed to them.

In the case of ERCs, the Miles Review* of the UK mortgage market identified the absence of symmetric mark-to-market charges on termination as an impediment to the take-up of fixed rate mortgages.

In his words: "From the Borrower's point of view, it [would make] the issue of portability irrelevant... Borrowers would not be stuck in a house that was no longer desired at a time of high interest rates because they wanted to keep their lower fixed rate deal. With symmetric mark-to-market charges, the refund obtained in that situation would offset exactly the increased cost of future payments on a new mortgage of equal value."

Incidentally, he doesn't necessarily blame mortgage lenders for this state of affairs and in fact acknowledges that lenders have been frightened off this type of charge by doubts over enforceability. Nevertheless, it is absurd that a lender charges you for breaking a fixed-rate when it would in fact be to their advantage for you to do so, i.e. when fixed rates for the remainder of the term are above the original fixed rate. This is a common problem today given that the yield curve has moved sharply higher than it was in 2003 across all maturities.

[Edit: It will be interesting to see if, following hints in the pre-Budget Report, which if any of Miles's recommendations are eventually implemented.]

* http://www.hm-treasury.gov.uk/media/3/C/miles04_470%5B1%5D.pdf

MarkyMarkD

Indeed, the Miles Review comments were interesting. But the reality is that nobody has any interest in implementing anything along those lines.

There were a number of lenders (NatWest was one, I think) which operated perfectly fairly calculated, "mark-to-market"-based, penalties on fixed rate mortgages. But when fixed rates fell substantially, the penalty calculated under these terms - which did no more than pass the exact cost of early termination onto the borrower - were slated as unfair simply because they were so huge.

It doesn't take much effort to do the maths - if you buy a 5 year fixed rate mortgage for £250,000, and 5 year swap rates fall by 4% (which happened) one year in, and you want to terminate your mortgage, the cost to NatWest would be £250,000 x 4% x 4 years = £40,000. And that's the sort of amount NatWest was asking its customers to pay. (The figures are slightly simplified because discounting applies in real life, but they are not far off).

Unfair? No. A lot of money? Yes.

So NatWest binned the principle of fair penalties. And moved to the alternative - which most lenders operate - of charging a fixed percentage of the balance, or a fixed number of months' interest. Both of these methods bear no resemblance to the true cost to the lender - but they are easy to understand, they are capped at a maximum amount, and they are not as much (in cash terms) as the amount which really happened in the NatWest scenario.

The pre-budget report comments are more of the same old - peddling the notion that there is a supply problem with long-term fixed rate mortgages, which there is not. The only possible way that long-term fixes can be made palatable to the majority of borrowers is to make penalties - even completely fair, mark-to-market based ones - illegal. And that's a stupid idea.

tinkerbell70_2

Hi all, i am a newbie to the forum tho have been following martins site for a long time, i need some help with regards to a mortgage that I have just payed off,
The situation was I bought a house for cash as I had it at the time but within a year needed to move as needed more room so bought another property selling the old one , now, after moving into the new property found that it had more underlying faults than first thought so had to take out a small mortgage of £ 20,000 to cover works needed doing, but I found it stressful having a mortgage to pay and due to health reasons have had to look for new property nearer other family, i sold the house making enough to buy a smaller house which gave me the extra to pay off the mortgage that i took out a year earlier, now as I have payed off this mortgage I have been charged £1000 as an early repayment fee, it did state I would have to pay 1% in my contract but it still seems quite steep to me , is there any chance of getting anything back, I am totally confused about all the different terms. Any help greatly appreciated.

dunstonh

it did state I would have to pay 1% in my contract but it still seems quite steep to me

If you thought 1% was steep then why did you buy that mortgage and not choose one with no tie in period?

is there any chance of getting anything back

Not a chance. Its fair, legal and valid.

samizdat

MarkyMarkD wrote: »

The pre-budget report comments are more of the same old - peddling the notion that there is a supply problem with long-term fixed rate mortgages, which there is not. The only possible way that long-term fixes can be made palatable to the majority of borrowers is to make penalties - even completely fair, mark-to-market based ones - illegal. And that's a stupid idea.

There is a supply problem. As has been pointed out in this thread, it may be unwise to rely on "portability" if you wish to move house within the UK while avoiding ERCs. There are very few people who really want to commit to not moving house for twenty years and a significant number who do not wish to tie themselves down for even five years. Those who may wish to rent in future or to emigrate are still less likely to take out a long-term fix.

Yes, you can get out and just pay the penalty but many of these deals only make economic sense if you are not going to do that. Fixed rate mortgages without penalties are also unattractive in their pricing for the obvious reason that you are paying for the break option.

Mark-to-market penalties are what allow long-term fixed rates to be priced competitively while allowing people the flexibility to enter into them regardless of their future plans. Given the inverted yield curve in the UK, long-term fixes ought to be very popular (just ask the private equity people) but they are not because of the big spread banks have to charge even where they also have ERCs in place. (As you point out, ERCs do put a cap on break costs but this cap must be paid for.)

The problem is due to questions over legal enforeability and it is only the government that can act to remove such concerns. If such charges/refunds were allowed, it would not mean they would be compulsory and the existing products could co-exist for those who prefer them.

fedupbeingbroke

We decided to arrange an interest only mortgage with Northern Rock back in January 2001 (fixed rate for 3 years) the completion fee for this was £495.
We decided because of the bad press to change to a repayment mortgage in April 2003, for this we were charged £465 repayment fee, and then another £495 completion fee and £150 application fee for the new mortgage. Just after arranging this new mortgage we had to take a loan for urgent home improvements from Northern Rock, they couldnt increase the mortgage but were happy to offer us a loan, they charged us £367 payment protection which we didnt need but dont remember having the option not to have it, and £299 for acting on the loan, as the monthly payments were horrendous it was suggested to us to add this as a 2nd part to the mortgage (its listed seperately on our statements), for this we were charged £210 application fee. At the end of the term of that mortgage (Feb 2006) we renewed with them and were charged £295 mortgage review fee and £695 product fee. I've also found paperwork for both Norther Rock and Halifax (our 1st mortgage provider) which says ...."we would normally only lend you £46,500 on this property but will lend you £58,900 because we will arrange additional mortgage security to cover the difference, the fee for this additional mortgage security will be £899.......we also had the same thing with Northern Rock paying the same amount for the same reason....the amountof money they were willing to offer us was only 75% of the value of the property.....both carried out their own surveys, both deals were 95% mortgages. I'm really sorry if this is long winded, but when you add it all up it comes to over £3000.....I was horrified.:eek: Can anyone tell me if I have a claim....p.s. phoned the Halifax today and they are sending me a cheque for £35 for overpyment of completion fees, yahoo....they were great by the way, no problem what-so-ever.

dunstonh

We decided because of the bad press to change to a repayment mortgage in April 2003, for this we were charged £465 repayment fee, and then another £495 completion fee and £150 application fee for the new mortgage.

Had you just changed to repayment and not the whole mortgage it would have cost you just £75.

when you add it all up it comes to over £3000.....I was horrified.:eek: Can anyone tell me if I have a claim

I doubt it. Most charges are retail charges which you agreed to when you bought the product.

You have gone about things the wrong way quite a few times. You should have seen a mortgage broker and sought advice as you wouldnt have made those mistakes. Perhaps note that for your next mortgage.

fedupbeingbroke

dunstonh wrote: »

Had you just changed to repayment and not the whole mortgage it would have cost you just £75.

sorry, not sure what you mean, we had to take out a completely new mortgage, we couldnt just change the existing one


I doubt it. Most charges are retail charges which you agreed to when you bought the product.

You have gone about things the wrong way quite a few times. You should have seen a mortgage broker and sought advice as you wouldnt have made those mistakes. Perhaps note that for your next mortgage.

I know, we feel really stupid about it now, I still think the charges are horrendous though...I'm still thinking about claiming though, do you not think I've got a chance on any of it