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

madge_markham

Thanks for the post.

No, the choice the bank has between getting the £1250 (and 6 month money itself because the term inter-bank market is currently non-existent, but that’s another story) and nothing. It is obvious that I would not be willing or able to pay the ERC, so that would never form part of their options.

For what it’s worth, I don’t think it’s unfair (after all, I agreed to it when I signed the contract), just illogical that they might not want to waive it. Were I to be the treasurer of a UK-based bank right now, I would be very incentivised to get my mortgage lending division to offer ERC waivers to anyone where it would benefit the bank. I guess clearing banks move slowly in that respect though!

Thanks for the replies.

dwsjarcmcd

madge_markham wrote: »

Thanks for the post.

No, the choice the bank has between getting the £1250 (and 6 month money itself because the term inter-bank market is currently non-existent, but that’s another story) and nothing. It is obvious that I would not be willing or able to pay the ERC, so that would never form part of their options.

No it's not, by your logic it would be the choice of the ERC's at £15,000 or the £1250 PLUS 6 months interest, which is a totally different thing

co123456

Ethically and Morally aside, if I wanted to get out of paying ERF, could I stand outside Northern Rock's local branch with a placard and cause them some (more) bad press?

dwsjarcmcd

cheeryoleary wrote: »

Ethically and Morally aside, if I wanted to get out of paying ERF, could I stand outside Northern Rock's local branch with a placard and cause them some (more) bad press?

No you would just look stupid

MarkyMarkD

@madge

I understand where you are coming from. But the idea that there is a funding crisis for all UK lenders is rubbish. It might be what the press are portraying, but it is NOT true. Most UK lenders are increasing the size of their lending book despite the funding crunch.

So all you are giving them, by repaying early, is saving a period of negative margin - your £1,250.

You might believe that nobody would pay the £15,000, but you'd be wrong. Many, many, many people pay ERCs. They are almost always illogical to do so, but they do so in their thousands.

They often have no choice.

Let me give you some scenarios:

- a couple break up and sell their house; they don't buy a replacement house because each of them cannot afford to do so in their own right. They have no choice other than to pay their ERC.
- a couple sell their house to move area. They need to borrow more money because the new area is more expensive, or they have more kids and need more space, or whatever. Or their credit rating has gone down the toilet because they've spent lots of money on credit and got into difficulties. They have no choice other than to pay their ERC because their existing lender won't lend them the additional amount they need (or, in the latter case, anything at all).

Because there is a substantial proportion of people who would pay the £15,000, it's not right to say that it forms no part of the consideration as to whether to introduce a large-scale ERC waiver policy. And that is why no bank will introduce such a policy.

There are few people in the position you are, of choosing when to sell their house. Most people sell when they need to, not when they want to.

Dan_Collins_2

madge_markham wrote: »

Thanks for the post.

No, the choice the bank has between getting the £1250 (and 6 month money itself because the term inter-bank market is currently non-existent, but that’s another story) and nothing. It is obvious that I would not be willing or able to pay the ERC, so that would never form part of their options.

For what it’s worth, I don’t think it’s unfair (after all, I agreed to it when I signed the contract), just illogical that they might not want to waive it. Were I to be the treasurer of a UK-based bank right now, I would be very incentivised to get my mortgage lending division to offer ERC waivers to anyone where it would benefit the bank. I guess clearing banks move slowly in that respect though!

Thanks for the replies.

OK this is simple, you have got the hump because you may have to pay the ERC that is 15k. Why take out a mortgage with that size a penalty if it is against your principles?? How about your boss says I wont pay you your bonus cos its to much but I will give you 10% of it so you will still make money!!

Cut the rubbish about unwinding mortgages etc, lenders just dont do this type of thing. Either dont redeme or pay the ERC! You made your bed now lay on it!

samizdat

MarkyMarkD wrote: »

@madge
Let me give you some scenarios:

- a couple break up and sell their house; they don't buy a replacement house because each of them cannot afford to do so in their own right. They have no choice other than to pay their ERC.
- a couple sell their house to move area. They need to borrow more money because the new area is more expensive, or they have more kids and need more space, or whatever. Or their credit rating has gone down the toilet because they've spent lots of money on credit and got into difficulties. They have no choice other than to pay their ERC because their existing lender won't lend them the additional amount they need (or, in the latter case, anything at all).

Because there is a substantial proportion of people who would pay the £15,000, it's not right to say that it forms no part of the consideration as to whether to introduce a large-scale ERC waiver policy. And that is why no bank will introduce such a policy.

I actually suspect that banks pay a great deal of attention to the expected rate of prepayment and then price mortgages so that their expected return in interest payments plus arrangement fees plus ERCs makes them a profit.

This can be seen by the fact that banks market loss-leading products priced with a negative margin over Bank Base Rate but with ERCs over the discount period. Clearly the ERCs in such a case cannot represent the cost of the prepayment option, since prepayment would by necessity be of benefit to the bank in all circumstances.

Instead, ERCs are set to recover some of the costs of selling a mortgage with a rate below cost in the knowledge that changes in people's private circumstances will always require a certain number of them to prepay even if it costs them a lot of money. I think this is pretty cynical, quite frankly.

Others will find that their creditworthiness has deteriorated making it impossible for them to remortgage, forcing them to stay on the uncompetitive follow-on rate once the discount period has ended. To a great extent, this is their own fault for buying that type of product but it's still rather unpleasant how high some of these follow-on rates can be.

High arrangement fees charged on many of the more competitive products are a kind of hidden ERC because clearly the earlier you redeem your mortgage, the greater the impact of the fees will be on your total cost of finance.

MarkyMarkD

I think your understanding of the process is spot on, samizdat, but I don't agree that it's cynical.

At any point in time it is always possible to get discounted/tracker rate mortgages with no ERC. It is harder to get fixed rate mortgages with no ERC, but that reflects the fact that there is a tangible risk to lenders of borrowers repaying en masse if there is a step change downwards in rates.

So, people have the choice of paying a premium rate, to get a mortgage with no ERC, or paying the lowest possible rate.

95% of people take the lowest rate.

What you are saying is cynical is in fact the customer's decision - to take the risk of getting screwed if their circumstances change, because it saves them a few bob in the short term.

Are you really suggesting they should be deprived of that option?

Dan_Collins_2

The choice should be the clients but they should not make a fuss when they have to pay the penalty and start coming up with finanial clap trap that used to drive me mental when I worked for a lender!!

IandD

Me and my husband took out a mortgage last year with an ERC, we are both discharged bankrupts from April 2005 and this was the best mortgage we were offered by our mortgage adviser (self cert), we knew we would be wanting to move house this year or early next year and the lenders agreed we could port the mortgage over no problem. However the lender has now sold on our mortgage and the new lender will not port over the mortgage and want £8000 to get out of it. We have 18 months left of our current deal so it looks like we are staying where we are as we are not prepared to lose this money.

Ironically looking into a new mortgage the best one for us would be with the original lender who sold on our mortgage.

Any advice please?

Many thanks