Mortgages. Lenders taken to task on exit fees

Author: Anna Mayo

The mortgage lenders have been playing a dirty, but totally legal, game on exit fees. In reaction to the amount of people that now choose to switch mortgages to make the most of competitive interest rates, they have been responding by raising exit fees by as much as 450% in the last 3-5 years – whats worse is, they havent bothered to tell the borrowers.

An exit fee is a charge that the mortgage lender enforces if a borrower leaves their mortgage before the end of the term. Its also known as a redemption penalty. Now the Financial Services Authority (FSA) has seen what theyre up to, its making a move to end these practices. (life assurance)

When people sign up for a mortgage in the first place, the lender has to stipulate exactly how much it will cost to leave the mortgage early. Thats a legal requirement. However a loophole leaves the way open for lenders to increase that charge without informing the borrower, so they can decide to remortgage after five years and find they have to pay a lot more than they thought.

The Cheltenham & Gloucester are one of the culprits – their exit fee has risen from £50 to £225 over the last few years, and the Woolwich have done something similar, increasing the fee from £95 to £275. Its the lenders way of cashing in on the activities of the ‘rate tarts i.e. people that switch mortgages regularly to make savings on their mortgages. They dont charge enough to stop the rate tarts, but they do at least get a small portion of the proceeds. (medical insurance)

The FSA is currently talking to the lenders to reach an agreement on this issue, which will hopefully be enforced and become practice by June 2006. The ideal outcome will be for exit fees quoted at the beginning to be fixed for the mortgage term, so whether you stay in the same mortgage for two or ten years, the exit fee will be the same as you were quoted.

This is a good opportunity to remind you that when you get a mortgage, you need to look at all the costs, charges and sometimes incentives relating to the deal, not just the interest rate. We have compared two similar looking deals from Northern Rock and Halifax to show you that the interest rate does not tell the whole story. (life assurance)

We have compared the two companies based on a 2-year fixed rate repayment mortgage for 25 years, exiting the mortgage at the end of the 2 year fixed period.

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