Challenging Redeption Charges on Mortgage

SpiderLegs

fewcloudy wrote: »

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?

You think a bank is going to spend the time and effort to assess each tiny package of lending and make on the fly decisions about shifting that few thousand pounds into some other areas?

Just think about the practicalities and costs of running an operation that way.

Hansibal

Of course they do spiderlegs.

There is no problem with doing this, banks don't go looking for someone to lend them 100k either if you come looking for a 100k mortgage. They don't do that for every individual case but wait a certain period (day/week/month) so pluses and minuses are easily balanced. Intraday/week they borrow for intra-banking rates or out of their reserves, and at the end (or beginning) of the period they package this up (if necessary) for longer term.

SonOf

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

Yes it is. I have a 5 year fixed mortgage with Santander and the ERC is plainly written in the key features illustration.

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

That has been the position in the UK for around a decade. Long before the EU directive. However, very few people have succeeded in challenging it. In 2015/16, there were just 508 new cases of ERC complaints. The FOS upheld just 21% of resolved cases. Now, that is all complaints to do with ERCs. Not just the size of the ERC. So, some of those may be unrelated. However, it does show that few people complain and of those that do, most do not succeed.

Everybody has the right to complain if they dont like something. However, the statistical expectation is that the complaint won't succeed. And the way these things generally work is that if the FOS considers an ERC to be wrongly applied on a technical level rather than individual level, then the lender would need to apply changes across the board to everyone else.

Hansibal

Thanks for that answer SonOf. I'll have a look at the FOS website to further educate myself...

I have in principle nothing against an ERC, but find it hard to believe, maybe even unjustifiable, that if i repay a 300k mortgage balance after one month the costs are 15k, and they are still 15k after 4 years and 11 months.

foxy-stoat

Hansibal wrote: »

I have in principle nothing against an ERC, but find it hard to believe, maybe even unjustifiable, that if i repay a 300k mortgage balance after one month the costs are 15k, and they are still 15k after 4 years and 11 months.

If you cannot agree the terms you have the right not to take out the £300,000 mortgage with that lender.

I thought all lenders had a sliding scale but if a lender had a blanket 5% for 5 years every year then I would either not use them or fix it for say 2 years instead of 5.

SonOf

I have in principle nothing against an ERC, but find it hard to believe, maybe even unjustifiable, that if i repay a 300k mortgage balance after one month the costs are 15k, and they are still 15k after 4 years and 11 months.

I do share a similar view and that is why I think the step down method works fairly. The single figure for the whole term does seem high. However, the key is to the method of financing and it is measured not at individual level but at the whole packaging across the board. So, if the financing for that tranche of lending requires the lender to pay the same for regardless of where it is in the process, they could justify it that way. And Santander have issued a range of structured products that only pay a return to the investor on maturity and not in the interim years. If they are using those for financing mortgages, then they could justify the charge easily.

Hansibal

found this on one of the FOS decisions:

FSO wrote:

It’s complex and onerous for lenders to calculate individual losses as and when individual
customers decide to terminate their contracts early. And it isn’t possible to estimate, for any
given individual, when or if they might do so. So Clydesdale is allowed to project how many
customers, on average, are likely to terminate early and, on average, at what point they’re
likely to do so, and to apportion that cost across the mortgages in the group. For some
individual mortgages that will end up being an over-calculation, but for others it will be an
under-calculation. But that’s allowed; Clydesdale doesn’t have to refund the difference, but
equally it doesn’t tell a consumer to pay the difference if it goes the other way

That's a case from July 19. It is indeed as you said SonOf, they get away with it. I still can't rhyme it with what the MCDO 2015 has to say about this ("the amount of compensation must not exceed the financial loss of the creditor").

SpiderLegs

Hansibal wrote: »

found this on one of the FOS decisions:


That's a case from July 19. It is indeed as you said SonOf, they get away with it. I still can't rhyme it with what the MCDO 2015 has to say about this ("the amount of compensation must not exceed the financial loss of the creditor").

That’s the whole point which you dismissed from my previous post. They don’t operate their multi billion pound businesses on individual cases. They don’t have to as it would be uneconomical for them to do so.
Just get over it.

Thrugelmir

Hansibal wrote: »

I have in principle nothing against an ERC, but find it hard to believe, maybe even unjustifiable, that if i repay a 300k mortgage balance after one month the costs are 15k, and they are still 15k after 4 years and 11 months.

Lenders work in tranches running into millions of pounds. Not singular mortgages. Securitisation of mortgage books has been used as a form of funding for some considerable time.

Your ERC diminishes as the mortgage balance reduces. Doesn't remain static at £15k.

Likewise lenders incur the majority of their costs upfront at the point of application. You'll be contributing to the cost of failed applications as well. Profit is made by the product running it's full term. Early termination adds yet another layer of administrative costs.