Grounds to appeal early settlement pennalty

CazBrighton

I have a mortgage with Santander.
There is 8,000 outstanding I wish to repay part of this early and have 3.000 available to do so.
The interest rate is 2.9% pcm fixed till November 2020 so I am paying £19.33 pcm interest.
However, there is an interest rate penalty of 5% if I repay early. This 5% charge has been the same for the duration of the loan.
I have been repaying small lump sums from time to time and have just realised that reducing the mortgage in the last year by £10,000 has cost me £500 in interest rate penalties.
I asked the bank about waving the interest rate penalty for any future payments as there is only 9 months left on the loan .
They said it would depend on the grounds I had to wish to repay the loan early.
I got some informal advice to look at the grounds for appealing against early penalties with the financial Ombudsman and I found this.
I can not post a link as I am a new member but you can google the ombudsman
As you can see one of the grounds is
"the ERC is excessive, or wasn’t based on a reasonable pre-estimate of the cost to the lender of the mortgage being repaid early"
I also got some informal advice the main reason for a penalty in this case is at the time the bank lends money at a fixed rate it borrows money at the same time.
So if there is an early settlement the bank is still tied into this loan and the penalty is to protect the bank form this.
I find it impossible to believe that with such a short period remaining (9 months ) the costs to the bank of the loan being repaid early are a reasonable pre estimate of the costs to the lender.
He calculated for me the extreme case where I repaid the loan with one month remaining the bank would receive a penalty of 5% plus the 2.9% interest = 1.079^12-1 = 49% as an APR
So I think this would be a strong case to appeal with the Ombudsman
Any advice gratefully received as I will contact my bank about this and if not take it to the Ombudsman

kingstreet

The agreement with the third party to provide the rate swap which funded your fixed rate will be a fixed percentage to a fixed end-date.

Santander will not be getting a discount because you are closer to the expiry date.

Often, a mortgage will be included in a RMBS (a security backed by residential mortgages) and Santander will actually continue to make the payments until the end of your fix to avoid having to break the RMBS.

I would say you have little chance of success with FOS as this is an acceptable way of funding mortgages in the UK and there is no inherent unfairness.

Thrugelmir

CazBrighton wrote: »

I find it impossible to believe that with such a short period remaining (9 months ) the costs to the bank of the loan being repaid early are a reasonable pre estimate of the costs to the lender.

Likewise lenders incur the majority of their costs upfront in the funding, marketing, underwriting and granting of the product. There'll be basing their costings on the mortgage product running it's full term. Far more complex than simply borrowing at x and lending at y.

Hence why ERC's are universally accepted as being based on commercial reality. Long established I should add. Any challenge will be fruitless.

CazBrighton

I am Caz’s friends and used to work for part of Lombard North Central I will still be preparing a challenge to the Ombudsman if the bank does not agree to wave these charges.
Part of my job was to calculate the costs on large commercial agreements if a customer wished to settle early on a fixed rate agreement.
If for example we had lent the customer £10 million fixed for 4 years fixed at 6% and for whatever reason the customer wish to settle say after two years six months later the original documentation would specify the calculation that we would used with 18 months left on the deal to calculate he penalty. It can be depening on the nature of the agreement a "simple" sum.
This would be based on what the 18-month swap rate was at the time.
I also worked in part of the organisation that lent on car finance and all the borrowing was done in aggregate,
So if in any one month 30 million of car finance deals were repaid early we would adjust the amount we borrowed in that month so that the duration of the loans we made to the public and the loans we had entered into in the swap market were the same. T
I would need to see a calculation in front of me showing how a 5% charge was reasonable with say one month left on a fixed rate product before I suggested she does not take the matter further. I can not link to the Ombudsman page but it states the lender must be able to provide a calculation justifying the charge. With one month left in the extreme case this woudl clearly be impossible

kingstreet

All the best.

CazBrighton

I would appreciate any contructive replies I do not have all the answers I diud work for a bank and if you were to be charged 5% to settle a morgage wiith one day left I would sppreciate a sensible reply from Bogy how this would be deemed reasoanable , biut I doubt they are capable

ACG

You had constructive comments from Kingstreet and they were more or less disregarded as friend knows best.

1 day is different to 9 months.

You want to break your contract early. The lender has costs to pay for sending the money back early. Regardless of what your friend thinks or how your friends employer works, that is completely irrelevant unless she works for Santander.

I am not one for analogies but I used to work for RBS and we charged residual interest on our credit cards, not all credit card companies charged residual interest and so we received a lot of complaints about that. It did not mean it was wrong, it just meant they did things differently. Appreciate it is not the same, but the point is that companies work in different ways and probably get different terms on their funding lines.

Do you think you will be the first person to complain to Santander about this? Do you think you will be the first person to go the ombudsman about it?

I do not know the answers on the above questions, but I doubt you will be. You are completely within your rights to complain (I have no idea why personally as the terms were fine when it suited you but hey ho, thats the industry we work in) it seems you have a friend more than happy to put some time in to it for you, so you have nothing to lose.

Sorry if that post offends, it isnt supposed to but I am all for being straight to the point.

BoGoF

The Ombudsman has ruled many times that ERC's are fair and reasonable.

And yes, if I signed up to a fixed term deal with ERC's then I would expect to pay them regardless of the time till they expired.

Stick the £3000 in a savings account till November.

Constructive enough?

To the 'friend' - a little knowledge is a dangerous thing.....as the saying goes.

csgohan4

OP you signed a contract where you agreed to the ERC, the bank are under no obligation to waive this fee no matter how small.

Your trying to wriggle yourself out of it, why not ask yourself why you didn't pay off more early on or shortened the term earlier? to pay it off

Both of which are not the banks fault, the lender is not at fault for OP wanting to break contract

Your friend isn't called Honest John by any chance?

Thrugelmir

CazBrighton wrote: »

I would appreciate any contructive replies I do not have all the answers I diud work for a bank and if you were to be charged 5% to settle a morgage wiith one day left I would sppreciate a sensible reply from Bogy how this would be deemed reasoanable , biut I doubt they are capable

Because you disagree with something isn't sufficient grounds for overturning a legally binding contract. If it were the case don't you think that a legal challenge would have mounted by now. After all fixed term mortgage products have been granted in their millions.