Fixed Rate Mortgage Early Repayment Charge - is it fair?

michaels

According to the ombusdman an ERP could be 'unfair' in terms of contract law if it exceeds the actual cost to the lender of the early repayment and the 'pre-estimate' of loss when the contract was entered into.

http://www.financial-ombudsman.org.uk/publications/technical_notes/mortgages-early-repayment-charges.html

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).

early repayment charge as a "pre-estimate" of cost to the lender If the charge is to be calculated in accordance with a formula set out in the mortgage agreement, it should represent a reasonable "pre-estimate" of the cost to the lender of the loan being repaid early. This is often a complex calculation.
However, a lender is allowed to calculate and price this "pre-estimate" on a product or portfolio basis. And so we look at the early repayment charge in the context of the product as a whole - and not by making individual calculations for consumers about the specific agreement they have.

I am 4 years into a 5 year 2.49% fixed mortgage which has a 5% ERC throughout the fix. Obviously if I were to repay now it would be unlikely to cost the bank more than the 2.5% lost interest for the remaining year which passes the first test on 'actual loss'.

However the 'pre-estimate for the product as a whole' seems to be something I can have no idea about.

Has anyone any experience of trying to get the ombudsman to rule on ERPs? Any no win no fee companies out there?! This could be worth pursuing because:

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.

kingstreet

If the lender bought a rate swap with an early repayment charge to the market counter-party which was level throughout, that would explain the reason why your ERC is level throughout.

Likewise, if the rate was retail-funded, the lender may have had to offer those funding the product a rate with a guarantee for the same period, with the same penalty-terms.

A lender may agree to such an ERC on a swap/funding package to get a better rate to offer to the market. As long as the ERC was set out in your KFI and mortgage offer, I don't see you avoiding it, regardless of the remaining agreement period.

michaels

Thanks - I am sure there is no mi-selling angle on the info provided, the only possibility would be on this 'pre-estimate' clause with respect to unfair contract terms. Almost certainly you are right that the bank can demonstrate that the pre-estimate was calculated correctly but is it reasonable for me to ask them to demonstrate this?

kingstreet

You can try, but as it will have been done for the whole tranche of funding you may find the terms are confidential between the funding source and the lender.

However, a lender is allowed to calculate and price this "pre-estimate" on a product or portfolio basis. And so we look at the early repayment charge in the context of the product as a whole - and not by making individual calculations for consumers about the specific agreement they have.

I suspect the FOS will take the view that the terms were clearly disclosed at least once in the application process (KFI or offer or both) and are the same terms which were acceptable to you at the time.

martinsurrey

michaels wrote: »

Thanks - I am sure there is no mi-selling angle on the info provided, the only possibility would be on this 'pre-estimate' clause with respect to unfair contract terms. Almost certainly you are right that the bank can demonstrate that the pre-estimate was calculated correctly but is it reasonable for me to ask them to demonstrate this?

if you look at the ombudsman cases there are plenty of ERC cases, and almost all of them go for the lender, unless you have something pretty exceptional the usual line is that as long as the lender correctly calculated the whole tranche of the mortgages on a reasonable basis, at the outset, and it was correctly disclosed then the ERC for every loan is reasonable.

In effect very early redeemers are partly funded by the very late redeemers (I was one of them).

I haven't seen a case where the lenders calcs were deemed wrong, ever, and the only way to get them to prove their calcs is by taking it to the ombudsman, you'll never see them.

Thrugelmir

michaels wrote: »

Any no win no fee companies out there?!

Even ambulance chasers need to win some cases in order to fund their overheads. Not in the market for something they cannot conceivably win.

In a broader context the mortgage market is highly competitive. As a result the commercial pricing of a tranche of funds is very keen. There's no mileage in lenders speculating on early mortgage redemptions to boost profitability. Simply not worth their time.

michaels

Other lenders charge decreasing stepped charges which to the lay person sounds more likely to reflect their actual costs of an early repayment.

kingstreet

Yes and had you secured such a product the rate is likely to have been higher than the one you selected.

Or there may have been a lower fee for yours compared to the others.

We really don't know.

What post-sales documentation do you have from the advisor who recommended this product?

Thrugelmir

michaels wrote: »

Other lenders charge decreasing stepped charges which to the lay person sounds more likely to reflect their actual costs of an early repayment.

Again you'd need to look at the entire picture. Is the product pitched at a fractionally higher interest rate. Even an odd .1% or so over a few hundred million pounds equates to more profit overall. Likewise does the the lender have the option of redeeming the funding stream that supports the product.

Nor forget that the lenders costs are primarily front loaded in selling and processing the product initially. Not as simple as the lender borrows at x and lends out at y. There's overheads, regulatory fees, tax, bad debts etc to be covered.

michaels

Thrugelmir wrote: »

Again you'd need to look at the entire picture. Is the product pitched at a fractionally higher interest rate. Even an odd .1% or so over a few hundred million pounds equates to more profit overall. Likewise does the the lender have the option of redeeming the funding stream that supports the product.

Nor forget that the lenders costs are primarily front loaded in selling and processing the product initially. Not as simple as the lender borrows at x and lends out at y. There's overheads, regulatory fees, tax, bad debts etc to be covered.

Although the product also had above average upfront fees. How would I know if the lender has the option of redeeming the funding stream that supports the product?

michaels

Thrugelmir wrote: »

Even ambulance chasers need to win some cases in order to fund their overheads. Not in the market for something they cannot conceivably win.

Hence asking the question about no win no fee - if they exist then it means someone else has done the legwork on the legal arguements and there is a good chance of a positive result, if they don't cover this area that implies that there is no winning arguement....