Unfair/Excessive Mortgage ERC?

xeena

Hi, I’m looking for some advice about whether a Mortgage Early Repayment Charge can be classed as unfair due to the severity of the charge.

Basically my bf and his ex signed up to a 2.99% fixed rate deal 2 years ago, without realising that it had a 5 year tie in @ 5% of amount repaid (so £5k on their £100k mortgage). They’ve now split and need to sell the house, and have only just realised about the redemption.

In my opinion, they received bad advice to take this deal as it did not meet their needs at all (relationship on the rocks at the time) and IMO the ERC is excessive (especially as the rate wasn’t even that good). I’ve looked at http://www.financial-ombudsman.org.uk/publications/technical_notes/mortgages-early-repayment-charges.html and whilst the ERC was disclosed in the paperwork (if not orally), I think that it could possibly still be argued as “unfair” due to the amount being charged:

“The lender's actual loss if a mortgage is repaid early is also a consideration. An early repayment charge may be unfair if it is more than the actual loss to the lender (except if it was a genuine "pre-estimate" of loss when the agreement was entered into).

If an early repayment charge is unfair, the consumer is not bound by it - even if they knew about it. The relevant rules do not allow a "reasonable" charge to be substituted.”

Has anyone successfully argued against an unfair ERC, or have any advice? Many thanks!

tomtontom

Why did they buy a house when the relationship was on the rocks, are you saying they told the advisor this?

Who is the lender, was it definitely an advised sale, and what is the exact wording of the clause?

dunstonh

Basically my bf and his ex signed up to a 2.99% fixed rate deal 2 years ago, without realising that it had a 5 year tie in @ 5% of amount repaid (so £5k on their £100k mortgage). They’ve now split and need to sell the house, and have only just realised about the redemption.

You really need to be careful with this boyfriend if he missed that. This is not some hidden term lost in pages of writing. This is big bold text repeated multiple times. It indicates poor financial management if he missed it or he is telling you porkies to try and blame someone else.

In my opinion, they received bad advice to take this deal as it did not meet their needs at all (relationship on the rocks at the time)

1 - did they get advice? until recently, most banks were not advice providers on mortgage. They were order takers. Only brokers gave advice.
2 - if they used a mortgage broker, did they tell the broker that their relationship was on the rocks?

If the relationship was really on the rocks then what were they doing buying a new mortgage? That isnt something a couple in that position generally do.

and IMO the ERC is excessive (especially as the rate wasn’t even that good). I’ve looked at http://www.financial-ombudsman.org.uk/publications/technical_notes/mortgages-early-repayment-charges.html and whilst the ERC was disclosed in the paperwork (if not orally), I think that it could possibly still be argued as “unfair” due to the amount being charged:

The ERC is not excessive and it meets the FCA criteria. There is no wrongdoing here. There were issues with some ERCs in the 90s and the FOS and FCA brought in guidelines but there have been no real issues since then. Mainly as the disclosure document for mortgages is set by the FCA. It is their layout and their rules.

Has anyone successfully argued against an unfair ERC, or have any advice? Many thanks!

On these forums you see the occasional person whinge about them and have put in complaints but no-one has reported any successes and there is nothing in the financial press (which looks at complaint outcomes and reports on the unusual).

The problem is that whilst you think they are unfair, they are not. 5% for a five year fix sounds ok. Its typically acceptable for 1% per year. The mortgage rate is funded by savers or investors who have agreed terms with the lender and they need to be paid their agreed rates until maturity. So, if the borrower pulls out, the lender still suffers the costs. So, its very easy for lenders to justify an ERC.

xeena

tomtontom wrote: »

Why did they buy a house when the relationship was on the rocks, are you saying they told the advisor this?

Who is the lender, was it definitely an advised sale, and what is the exact wording of the clause?

It was a remortgage on their current house. I'm not saying they told their advisor that the relationship was on the rocks, but if they were told about the 5 year tie in then it would've rung alarm bells with them.

It was a local financial advisor, apparently. The ERC section is quite clear - it's set out in a table with examples and says it's payable til Dec 18 at a rate of the amount repaid x 5%.

Thanks for taking the time to reply.

xeena

dunstonh wrote: »

You really need to be careful with this boyfriend if he missed that. This is not some hidden term lost in pages of writing. This is big bold text repeated multiple times. It indicates poor financial management if he missed it or he is telling you porkies to try and blame someone else.
.

He is indeed quite dopey when it comes to finance but is fantastic in all other respects!

dunstonh wrote: »

1 - did they get advice? until recently, most banks were not advice providers on mortgage. They were order takers. Only brokers gave advice.
2 - if they used a mortgage broker, did they tell the broker that their relationship was on the rocks?

If the relationship was really on the rocks then what were they doing buying a new mortgage? That isnt something a couple in that position generally do.
.

As answered in my post above. They remortgaged to get a better rate but didn't realise they were committing to an ERC. Kids involved so was never going to be an instant split.

dunstonh wrote: »

The ERC is not excessive and it meets the FCA criteria. There is no wrongdoing here. There were issues with some ERCs in the 90s and the FOS and FCA brought in guidelines but there have been no real issues since then. Mainly as the disclosure document for mortgages is set by the FCA. It is their layout and their rules.



On these forums you see the occasional person whinge about them and have put in complaints but no-one has reported any successes and there is nothing in the financial press (which looks at complaint outcomes and reports on the unusual).

The problem is that whilst you think they are unfair, they are not. 5% for a five year fix sounds ok. Its typically acceptable for 1% per year. The mortgage rate is funded by savers or investors who have agreed terms with the lender and they need to be paid their agreed rates until maturity. So, if the borrower pulls out, the lender still suffers the costs. So, its very easy for lenders to justify an ERC.

Thanks, this is the kind of info that I was after - just to figure out how they calculated the costs and whether they could easily justify it. I appreciate your reply

magpiecottage

One of the difficulties you face with a loan from two years ago is that there will have been an illustration before they applied for the loan and a mortgage offer which both set out very clearly what would be charged if they repaid early.

This means it is virtually impossible to argue to FOS that it should have been a surprise to them.

For the reasons dunstonh has given, the charge would not represent an excessive sum in the eyes of FOS, so that leaves you with pursuing the adviser.

However, the adviser can only go on what he is told by the borrowers in terms of what their intentions are.

JimmyTheWig

xeena wrote: »

They remortgaged to get a better rate but didn't realise they were committing to an ERC. Kids involved so was never going to be an instant split.

Fair enough it was never going to be instant, and fair enough to want a lower rate while the split is happening (one less thing to argue about, if nothing else!).
But ERCs aside, I still don't get why they went with a 5 year fix?
They would have got a better rate (surely?) with a 2 year fix? What made them choose the longer fix at a higher rate?

Do they have paperwork from the broker that gives the reasons for suggesting this particular product?

roonaldo

It's not really for you to qualify why they should have had a 2 year fixed over a 5 year fixed as for them it was the right thing at the time. In retrospect it was not a good idea but also in retrospect I picked the wrong Lotto numbers last night.

The ERC would have been on the Key Facts and Mortgage Offer and its not unfair.

JimmyTheWig

roonaldo wrote: »

It's not really for you to qualify why they should have had a 2 year fixed over a 5 year fixed as for them it was the right thing at the time. In retrospect it was not a good idea but also in retrospect I picked the wrong Lotto numbers last night.

If a five year fix was right for them at the time then the chances are that a five year ERC was right for them at the time.
I know that it's not my place to decide this, but if it is something that I have spotted then it is something that the advisor may spot in defending his selling.

fabiom

Hi Xeena,

I am with you on this one. I am currently within a 5 year FIX with First Direct and will be hit with a 2% ERC. I am crystal clear about the fact that this ERC was well publicised and advertised and highlighted and known to me on day 1. The fact that this is well communicated to me has nothing to do with whether this charge is fair or not. I will be trying to argue as this is unfair and is by far exceeding any loss [and from my understanding of UK financial regulations this needs to be actual loss as opposed to loss of further income] to the lender from me repaying early.

FirstDirect/HSBC is one of the biggest lenders in the UK and they have 2 options on what to do with your mortgage, either securitize it (package it into a pool with other mortgages and sell it to sophisticated institutional investors that invest in RMBS) or to keep it on its books and take advantage of cheap funding via FLS (UK Govt's Funding for Lending Scheme). The sophisticated institutional investors are well aware of pre-payment risk and are expecting it and are modelling for it in the first place. If FirstDirect have securitzed my mortgage, I will be arguing that they have not suffered a loss, hence should not be charging me the fee to compensate them for the loss. If they have not securitized it, I will be arguing that they 1) should have modelled and expected some degree of pre-payment risk, that 2) charging me ££££ is in excess of actual loss of further income especially given they had excessive returns vs the benchmark for the past few years.

As far as I can understand from regulatory documents, the ERC should be fair and be a good estimate of the actual loss suffered by the lender. I think this is a bold move, but in my opinion an ERC can be successfully challenged, specially given the changing dynamics of global capital markets, where banks pass on the risk via securitization, but still would like to keep charging the ERCs on top of not suffering a loss..

I think this ERC will bite the banks in the a** in few years time and the music will stop - same as it did for other excessive fees, same as Libor and FX did, same as PPI did.

Also, I think its the Mortgage competition that FCA and CMA should be looking into and not the competition in the current accounts market.

dunstonh

Jeez, all negative commenters - still employed by high street lenders?

That is a silly comment to make. It shows an immaturity.

I will be trying to argue as this is unfair and is by far exceeding any loss [and from my understanding of UK financial regulations this needs to be actual loss as opposed to loss of further income] to the lender from me repaying early.

And lenders have been successful in meeting that criteria.

but in my opinion an ERC can be successfully challenged, specially given the changing dynamics of global capital markets, where banks pass on the risk via securitization, but still would like to keep charging the ERCs on top of not suffering a loss..

Take it to court then.

I think this ERC will bite the banks in the a** in few years time and the music will stop - same as it did for other excessive fees, same as Libor and FX did, same as PPI did.

There is not even a hint of it being challenged. However, if your prophecy comes true then you can kiss most mortgage deals goodbye or see the introduction of even higher arrangement fees. A situation that would make most worse off.