Mortgage Penalties

Telegraph 28/06/2006

Lenders are increasing the fees by stealth, but you should not have to pay them, says Emma Lunn.

Recovering mortgage exit fees as high as £295 could become easier because the Financial Services Authority has warned lenders that they can only charge costs that are justifiable, say experts.

Mortgage maze: you shouldn't have to pay an exit fee.

Last week the FSA criticised banks and building societies for targeting customers with massive increases in exit fees through unclear contractual terms buried in the small print of mortgage agreements.

The move is expected to make it easier for consumers to recover exit fees charged by lenders simply for dealing with the administration of redeeming a mortgage.

The regulator is particularly concerned by the common practice of writing into mortgage contracts the freedom to increase exit fees unilaterally. The fees are sometimes known as mortgage exit administration or redemption administration charges.

Alliance & Leicester, for example, charged an exit fee of £150 in 2001 but it has shot up to £295 today. Abbey's exit fee has jumped from £85 to £225 in the past five years, while within the past couple of weeks the Royal Bank of Scotland group (which includes NatWest) announced that several of its mortgage providers, including First Active and Tesco Mortgages, would increase exit fees from £195 to £225.

advertisementExit fees supposedly cover costs such as dealing with the Land Registry, and other work undertaken by the lender, when a mortgage is redeemed by being paid off in full or by the customer switching to a better deal elsewhere. But the FSA says sudden, big rises in the fees could be unfair and unjustifiable, particularly as electronic systems have made much of the process quicker and cheaper.

Darren Cook, the head of mortgage research at moneyfacts.co.uk, the financial comparison website, says: "Not only have we seen an increase in the number of providers imposing these fees but the charges have also risen steeply, at a rate much higher than inflation.

"Exit fees tend to offer no tangible benefit to the consumer and are often tucked away within the small print of the application, leaving some consumers oblivious to their obligation."

But consumers are fighting back against unfair charges levied by financial institutions. In the past few months Which?, the consumer group, has been urging consumers to tackle banks about extortionate charges for going overdrawn or missing payments. It is providing advice and letter templates for customers wanting to reclaim unfair bank charges.

Which? plans to look at mortgage exit fees later in the year. It says the principles for recovering unfair charges through the ombudsman are the same whether for mortgages, credit card fees or bank penalties.

The FSA's move is part of a wider trend of regulators clamping down on spurious penalties in financial services and comes just months after the Office of Fair Trading said that any credit card default fee of more than £12 was unfair.

"Although lenders claim they cover the administration costs of closing a mortgage account, the fact that they [exit fees] have risen so steeply in recent months has left many borrowers feeling that there is an element of profiteering involved," says Melanie Bien of Savills Private Finance, the mortgage broker.

"It also doesn't make sense that some lenders charge much higher exit fees than others."

One of the main concerns about exit fees is that in most mortgage contracts lenders state that they can change these fees rather than keep them fixed over the life of the contract.

Recently, however, Alliance & Leicester bucked the trend and said it would fix the exit fee at the time the loan is taken out. While the move should be commended, at the moment the bank is the worst offender, with an exit fee of £295. Northern Rock is the only other lender that guarantees to fix its fee.

Borrowers who wish to reclaim some or all of their mortgage exit fee should first complain to their lender, stating why they think the charge is too high.

Ray Boulger of John Charcol, the mortgage broker, says borrowers could have grounds for complaint to their lender if the exit fee is significantly higher than quoted when they took the mortgage out.

He says: "If the lender refuses to reduce the fee to a reasonable level, which would be an amount close to the fee quoted when you signed up to the mortgage, tell the lender you will complain to the Financial Ombudsman Service."

The FOS, headed by Walter Merricks, is an independent service for resolving disputes between consumers and financial firms. Before you can go to the FOS, you need to give the lender eight weeks to respond to your complaint. If you cannot agree, either download and complete a complaint form from the FOS website or speak to its consumer helpline. You may also have to send the FOS further documentation to support your case.

The service is free as it is funded by member organisations, which have to pay a case fee when a complaint is lodged against them.

Emma Parker of the FOS says it currently receives only a small number of complaints about mortgage exit fees and almost all are resolved by mediation, the first stage of the ombudsman process.

"We ask firms if they have issued their final response to the customer and then we get an adjudicator to look at the case," she says. "We mediate and speak to both sides and look at why the consumer thinks the charge is unfair. In most cases, the lender reduces the fee as a gesture of goodwill."

But mortgage brokers are more cynical and reckon it is fear of the ombudsman rather than "goodwill" that leads to lenders backing down.

If mediation fails, the next stage of the process is formal arbitration, in which the ombudsman looks into the case and sets out what the solution should be. This is binding on the financial organisation concerned and if a mortgage exit fee case went this far it could be used as a test case by other complainants.

"Lenders are dead scared of the FOS making a decision on a case as this would set a precedent," says Boulger. "Rather than reduce the fees for everyone - which would be the result of FOS intervention - lenders would rather charge everyone more and then make refunds to the relatively small proportion of people who complain."

His view is backed up by Bien, who says most borrowers are successful when challenging fees. "The FSA's decision to query exit fees suggests that lenders are on shaky ground and they know it," she says. "Most lenders will back down to avoid you going to the ombudsman because they know it is impossible to justify some of the highest fees."

Moneysupermarket.com, the price comparison website, says the FSA should make all lenders guarantee to fix exit fees so borrowers do not get a nasty shock when they remortgage.

"By guaranteeing that the exit fees will stay the same from the day the contract is signed, consumers will find it easier to compare deals," says Louise Cuming, moneysupermarket's head of mortgages.

"We welcome A&L's move to guarantee exit fees at £295, although it could be said that this fee is still excessive."