Challenging Redeption Charges on Mortgage

cyclemedic

We've recently had repay a mortgage 6 weeks before then end of the 5 year fixed rate term. We sadly didn't realise the amount of the penalty (£2600) .....4% of the balance, in time otherwise we would have ported the mortgage to the new property to save the charges, but contracts had been exchanged and we only had 10 days until completion.


Just wondered if anybody had had any success in getting refunds of redemption penalties.... are mortgage contracts not covered by contract law, where a charge for breach of contract (ERC) has to be proportionate to the loss suffered by the lender, otherwise it becomes a penalty and is unenforceable?



The lender had have 97% of the benefit, but still charged 100% of the exit fee, as if the mortgage had only run for a few months.....


thanks

[Deleted User]

The lender has to borrow the money to give to you. They have costs for borrowing this and for repaying it early in the exact same way you do.

There is a 0% chance of an erc being challenged successfully

SonOf

Just wondered if anybody had had any success in getting refunds of redemption penalties..

There was a period about 20 years ago where some contracts were insufficient. However, that led to a format being introduced by the FCA and the FOS letting it be known what they would consider suitable and it killed off the ERC complaints before they got going.

The lender had have 97% of the benefit, but still charged 100% of the exit fee, as if the mortgage had only run for a few months.....

ERCs usually step down the closer you get to the deal tie in date. e.g. a 5 year fixed would usually drop down from figures like 5% in year one, 4% in year two etc

4% seems high for a final year tie in. are you sure it is that amount?

Lenders finance mortgages by using other peoples money. The lenders have to pay those other people. This is done using fixed term deposits and money markets chiefly. So, whilst you are clearing your loan, the lender still has to pay the people financing it.

ccbrowning

I have a similar mortgage, but it goes from 4%, to 3%, and then to 2% in the final year. However, the terms are quite explicit and I had to sign a document saying I read these terms. So, I don't see how you can get out of it, but I would find your documents and double check the %.

[Deleted User]

cyclemedic wrote: »

We've recently had repay a mortgage 6 weeks before then end of the 5 year fixed rate term. We sadly didn't realise the amount of the penalty (£2600) .....4% of the balance, in time otherwise we would have ported the mortgage to the new property to save the charges, but contracts had been exchanged and we only had 10 days until completion.


Just wondered if anybody had had any success in getting refunds of redemption penalties.... are mortgage contracts not covered by contract law, where a charge for breach of contract (ERC) has to be proportionate to the loss suffered by the lender, otherwise it becomes a penalty and is unenforceable?



The lender had have 97% of the benefit, but still charged 100% of the exit fee, as if the mortgage had only run for a few months.....


thanks

If you received advice from a broker you have more chance with a complaint through that avenue. My network are so hot on avoidable ERC's. If I say that there was an ERC paid then i have to write up so much justification to say why i didnt port it. Essentially have to make a saving over the remaining erc term to justiy doing it

Did you get advice on your mortgage or did you do it yourself?

Brock_and_Roll

are mortgage contracts not covered by contract law, where a charge for breach of contract (ERC) has to be proportionate to the loss suffered by the lender, otherwise it becomes a penalty and is unenforceable?

From a banking perspective these costs are not just pure profit - they are based (or at least have a basis) on real costs that the bank has.

Without getting into the technicalities too much, when a bank offers say 1,000 5 year fixed rate mortgages at say 3%, it has interest rate risk because the bank mostly funds these mortgages by borrowing in the capital markets at variable rate.

So to hedge this big risk, the bank enters into "interest rate swap" agreements to swap variable rate for fixed rate. If these contracts are broken early, there will be a charge (or a credit) depending on what has happened to rates since the contract started.

That said, in my long banking experience, ERCs in consumer credit have now morphed into becoming more about the bank compensating itself for upfront discounts & costs.

Hansibal

Hi,

I found this thread after investigating a mortage offer I got from Santander that quoted me a 5% ERC for the entire duration of a 5 year fixed rate mortgage, and was looking if this was normal.

I am from the Netherlands originally, and a couple of years ago there was a fairly big national mis-selling scandal because of over-inflated ERC being charged. This after a European directive, Directive 2014/17/EU on mortgage credit, came into effect
It says

The compensation should not exceed the financial loss of the creditor.

The full text of the law can be found by google (sorry, I can't add URLs as I am a new user), and it is specifically paragraph 66 that applies. I do not know how this is implemented in UK law though so you might want to find that out as well

In Holland, the costs of a bank are roughly a function between the time remaining on a mortgage and the difference between your fixed rate and the rate currently on offer for the remaining period (I guess the reasoning is that the money that the bank currently lends to you (and thus has securities for) for x weeks for x rate could now be lend to another person for that period.
In your case, I would argue that the maximum cost to the bank are 6 weeks interest, whatever that comes to in your case, but I doubt it will be more than couple hundred pounds.

Hope you have any success, it is a ripoff amount you have been charged.

Kind regards,
Hans

Hansibal

Further to the above, the directive was implemented into UK law in the The Mortgage Credit Directive Order 2015 which states:

(4) The creditor is entitled to fair and objective compensation, where justified, for possible costs directly linked to the early repayment but the creditor must not impose a sanction on the borrower and the amount of compensation must not exceed the financial loss of the creditor.

SonOf

I found this thread after investigating a mortage offer I got from Santander that quoted me a 5% ERC for the entire duration of a 5 year fixed rate mortgage, and was looking if this was normal.

It is not normal nowadays as you would expect a step down penalty today. However, it was normal in the past.

I am from the Netherlands originally, and a couple of years ago there was a fairly big national mis-selling scandal because of over-inflated ERC being charged.

No there wasn't. No scandal took place. It was just a clarification of what was expected for the future.

This after a European directive, Directive 2014/17/EU on mortgage credit, came into effect

I think you will find that directive had nothing to do with it as it was the FOS that directed change and they did so many years earlier.

I do not know how this is implemented in UK law though so you might want to find that out as well

The UK was already in compliance before the directive.

fewcloudy

Deleted_User wrote: »

The lender has to borrow the money to give to you. They have costs for borrowing this and for repaying it early in the exact same way you do.

I understand this answer, and see it written on these boards all the time.

The bit I don't get it is... just because I might decide to pay back my lender early, why does the lender have to repay it early (to wherever they borrowed it from)?!

If borrow 300k and agree it's for 5 years but want to give it back after 4, why don't the bank just invest it somewhere or lend it out again for the year to avoid these 'costs', before dutifully repaying it after 5 years as agreed?

Hansibal

SonOf:

It is still normal, for example Santander still have a 5% ERC for the entire length of a 5 year fixed rate.

There wasn't just new guidance for the future, a lot of excess early repayment charges were repaid for those charged after 2016, and some bank voluntarily repaid those excess charges between 2011-2016 as well. Nationale Nederlande doesn't want to pay back for a period before 2016, and this is still going through the courts, challenged by the Consumentenbond en de VEH. It concerns about 100.000 people, so I would call that a reasonable amount of people affected.

The UK might have been in compliance before the EC directive, however it still stands that banks can't charge more than their costs.