Early Redemption Charge on Abbey Mortgage Unlawful

[ShowMeTheLight]

I have a mortgage with Abbey of the Santander Group, previously known as Abbey National. The figures are as follows

 

Mortgage Amount £134,000.00

APR - 5.69%

Early Redemption Chargge - £3987.72

Charges Apply Until - 03/04/2010

 

I have just asked Abbey for a new variable rate and they have offered me 3.29% and my payments would reduce to £366.09 a reduction of 40%.

 

My circumstances are as follows.

 

1. I have lost my Job.

2. I am on Job Seekers Allowance.

3. I have unsecred loans that amount to £34,000.00

4. I am in the process of setting up agreements for reduced payments.

5. I am also in the process of requesting CCA agreements from my creditors.

 

I want to change the rate over to the more favourable one without paying the Early Redemtion Penalty. I have heard that many cases have been successful. Please read the following extracts

 

"There are lots of arguments on both sides. Most claimants have based their arguments on similar lines to bank charges. They say that the redemption charge is a charge for breach of contract, because by switching mortgages you are terminating your contract before the agreed period. Thus, they argue, any charge that is greater than the mortgage company's administrative costs is a penalty, and penalty charges are illegal"

 

Are Mortgage Redemption Charges Unlawful?

 

Please can the senior members give me their invaluable direction into what options I have if any or if there are any templates that I can use to help me. Thank You in advance

[rickyd]

The early redemption charge exists to provide a reason for us to stay with a given product. It is normally levied because the mortgage is set at a fixed or tracker rate for a given period and in most cases expires at the same time as the fixed/tracker rate.

 

There is an element of risk to both the bank and the borrower if the interest rate changes dramatically during the term. For example, if the interest rate falls the borrower with a fixed rate will be paying more than required if the rate had been variable. But if the rate rises, the bank loses out by not being able to increase the payments.

 

The mortgage price setters therefore have to make a finely balanced judgements as to what the rate should be going forward and take educated guesses about where the rate may go during the fixed rate period.

 

Imagine the chaos then if people could simply change without cost whenever rates went down, but hang on to the fixed rate if base rate went up? In order for this to be fair, then banks would also need to be able to change the rate when it suited them but it is a contract and neither side can change the terms without the approval of the other.

 

The Early Redemption Charge is a concession to this law whereby they will let you change the product if you pay them £xxx. To be legal, the ERC must be clearly stated at the outset so you know what you're getting into.

 

I do sympathise with your situation though and wonder if there might be another solution to your dilemma?

 

The ERC lasts until April 2010 which is 8 months away. You haven't said how much you'll actually save by changing to their variable rate but using the 40% figure I reckon its about £240/month.

 

if you multiply the monthly amount by 8 that would save you approx £1920 which is roughly half of the charge. If they will allow you to add the erc into your new mortgage rate that seems to be a reasonable outcome as you'll benefit from the reduced payment right away, albeit the total loan will have increased.

 

I was also going to suggest asking the bank if you could switch to an interest only mortgage but based on these figures it looks like it already is on this basis.

 

Although Abbey do not subscribe to the HMS (Homeowners Mortgage Scheme), they do offer something similar for helping those with a drop in income so I would suggest a visit to discuss your situation. Its also worth talking to the Jobcentre to see if you qualify under the SMI (Support for Mortgage Interest) scheme.

 

Whatever you decide to do, I wish you the best of success as I know how losing a job feels but remember there is plenty of help and advice available.

[Beck1968]

The early redemption charge exists to provide a reason for us to stay with a given product. It is normally levied because the mortgage is set at a fixed or tracker rate for a given period and in most cases expires at the same time as the fixed/tracker rate.

 

There is an element of risk to both the bank and the borrower if the interest rate changes dramatically during the term. For example, if the interest rate falls the borrower with a fixed rate will be paying more than required if the rate had been variable. But if the rate rises, the bank loses out by not being able to increase the payments.

 

The mortgage price setters therefore have to make a finely balanced judgements as to what the rate should be going forward and take educated guesses about where the rate may go during the fixed rate period.

 

Imagine the chaos then if people could simply change without cost whenever rates went down, but hang on to the fixed rate if base rate went up? In order for this to be fair, then banks would also need to be able to change the rate when it suited them but it is a contract and neither side can change the terms without the approval of the other.

 

The Early Redemption Charge is a concession to this law whereby they will let you change the product if you pay them £xxx. To be legal, the ERC must be clearly stated at the outset so you know what you're getting into.

 

I do sympathise with your situation though and wonder if there might be another solution to your dilemma?

 

The ERC lasts until April 2010 which is 8 months away. You haven't said how much you'll actually save by changing to their variable rate but using the 40% figure I reckon its about £240/month.

 

if you multiply the monthly amount by 8 that would save you approx £1920 which is roughly half of the charge. If they will allow you to add the erc into your new mortgage rate that seems to be a reasonable outcome as you'll benefit from the reduced payment right away, albeit the total loan will have increased.

 

I was also going to suggest asking the bank if you could switch to an interest only mortgage but based on these figures it looks like it already is on this basis.

 

Although Abbey do not subscribe to the HMS (Homeowners Mortgage Scheme), they do offer something similar for helping those with a drop in income so I would suggest a visit to discuss your situation. Its also worth talking to the Jobcentre to see if you qualify under the SMI (Support for Mortgage Interest) scheme.

 

Whatever you decide to do, I wish you the best of success as I know how losing a job feels but remember there is plenty of help and advice available.

 

Good Reply :D:D

[ShowMeTheLight]

The early redemption charge exists to provide a reason for us to stay with a given product. It is normally levied because the mortgage is set at a fixed or tracker rate for a given period and in most cases expires at the same time as the fixed/tracker rate.

 

There is an element of risk to both the bank and the borrower if the interest rate changes dramatically during the term. For example, if the interest rate falls the borrower with a fixed rate will be paying more than required if the rate had been variable. But if the rate rises, the bank loses out by not being able to increase the payments.

 

The mortgage price setters therefore have to make a finely balanced judgements as to what the rate should be going forward and take educated guesses about where the rate may go during the fixed rate period.

 

Imagine the chaos then if people could simply change without cost whenever rates went down, but hang on to the fixed rate if base rate went up? In order for this to be fair, then banks would also need to be able to change the rate when it suited them but it is a contract and neither side can change the terms without the approval of the other.

 

The Early Redemption Charge is a concession to this law whereby they will let you change the product if you pay them £xxx. To be legal, the ERC must be clearly stated at the outset so you know what you're getting into.

 

I do sympathise with your situation though and wonder if there might be another solution to your dilemma?

 

The ERC lasts until April 2010 which is 8 months away. You haven't said how much you'll actually save by changing to their variable rate but using the 40% figure I reckon its about £240/month.

 

if you multiply the monthly amount by 8 that would save you approx £1920 which is roughly half of the charge. If they will allow you to add the erc into your new mortgage rate that seems to be a reasonable outcome as you'll benefit from the reduced payment right away, albeit the total loan will have increased.

 

I was also going to suggest asking the bank if you could switch to an interest only mortgage but based on these figures it looks like it already is on this basis.

 

Although Abbey do not subscribe to the HMS (Homeowners Mortgage Scheme), they do offer something similar for helping those with a drop in income so I would suggest a visit to discuss your situation. Its also worth talking to the Jobcentre to see if you qualify under the SMI (Support for Mortgage Interest) scheme.

 

Whatever you decide to do, I wish you the best of success as I know how losing a job feels but remember there is plenty of help and advice available.

 

Thanks Rickyd, I will speak to my lender and see if a deal can be made. Excellent response.

[T23TGS]

Hi all.

Please could I ask for some advice....

My wife and I took a £200,000 mortgage three years ago on a 10 year fixed rate with HSBC which was given free and I believe at a rate of 6.25 (TBC). Unfortunately we have now separated and the house has just had an offer accepted on it. I have contacted HSBC informally and been told that the remaining amount is just over £195,000 and the early redemption fee is almost £20,000. Obviously this is a huge amount, over 10% of the borrowing, and so I would like some thoughts on how to reduce this? It has been suggested to go to the Financial Ombudsman. Obviously I need to address this more formally with HSBC but I was hoping someone could give me some advice before I talk to them to give me an idea of what might be possable.

Thanks in advance.

Tom

[rickyd]

At first sight a 10% ERC seems way over the top, so I would be asking for a copy of the original agreement. several banks have higher rates but they tend to be on a decreasing basis, 5% in year one, 4% in year 2 etc. I haven't heard of a 10% rate, but if it does exist, I think a fixed 10% is very, very greedy.

 

You really need to see the original offer document (or your copy) to check this out before you can take the next step.

[T23TGS]

Thank you for your responce. After a lengthy talk this eve with HSBC over the phone it seems we owe £195K. We took the mortgage in 2007 at £200K and have been paying just over £1350 a month for just over three years. We agreed to a 10 year fixed rate as it was offered free and at the time we didn't think the worst was going to happen. HSBC have confirmed if we pay back the outstanding amount today we will have to pay an additional £15K in a fine. This seems extreemly high considering we have paid £48,600 in interest and getting the mortgage down by £5K in three years.

 

I have a face to face with HSBC next week, any advice? Any thoughts on a firm who might be able to claw the fine back for me. I dont mind paying a % as long as HSBC dont get away with charging what seems to be such a large amount for doing so very little...

[rickyd]

A quick calculation shows the ERC to be charged at approx. 7.7%, which kinda suggests the fee is reducing. If, as you say it was 10% for a 10 year fixed rate, then 10% in 2007, 9% in 2008, 8% in 2009 and 7% in 2010 is par for the course on these things. The higher initial rate probably comes from the lack of no arrangement fee.

 

To be fair, this isn't a fine, its part of a fixed rate contract where they guarantee not to change the rate for ten years and you agree to pay their early repayment charges if you want to break the agreement.

 

Having said that, the rate doesn't seem to be particularly competitive, but that may reflect the prevailing conditions at the time and rates have fallen quite sharply since then.

 

I'd be inclined to meet with them face to face and explain your situation in a calm and deliberate way and ask for their advice. Please be really cautious about firms who claim they can help (and charge handsomely for the service) as this contract is very unlikely to be flawed. Because the principle of early repayment charges is well founded and because HSBC's reputation is largely intact, there is a really strong possibility that this charge will need to be paid.

 

I'm loathe to defend them in this scenario but the only way I can see out of this would be if the paperwork was defective, in not making the charges explicit and not explaining them clearly.

 

Hope this helps?

[chucky399]

Hi All,

 

My situation is somewhat similar but with one other very important twist. I have a two year fixed term deal with C&G which ends at the end of December 2010. I have sold my house and initially requested to port the mortgage to the new property I have purchased. The deal was portable so I didnt see this as beign a problem. However C&G have declined to offer me a new mortgage on the new property. They say this is down to their lending criteria. I have never once been in arrears or missed any payments and have been offered a mortgage by Halifax for the new place. C&G still want me to pay £2400 ERC.

 

My argument with them at the momenet is this. As they did not allow me to port the mortgage over, as per the agreed terms and conditions and as they did not offer me another mortgage, why should I pay their ERC? They in effect have forced me to look elsewhere for a new deal, so why should I be forced to pay their charges?

 

I am initially looking at TCF regulations, particularly outcome 6 which states "consumers do not face unreasonable post sale barriers imposed by firms to change products, switch provider, submit a claim or make a complaint" I feel C&G have fallen far short of this requirement. I am also considering the "unfair terms and conditions of contract regs" and a letter posted elsewhere on this site which refers to the OFT, as below..

 

A term in a mortgage agreement which requires the borrower to pay more for breaching the contract than actual costs and losses caused to the lender by the breach (or a genuine pre-estimate of that) is likely to be regarded as an unfair penalty and to be unenforceable at Common Law and (in a consumer mortgage) under the Unfair Terms in Consumer Contracts Regulations

Can anyone shed any light on my position? My current thought here is to offer to pay the interest to the end of december - about £600 - saving myself £1800.

Thanks

Chucky

[rickyd]

I sympathise with your situation which seems wholly unfair. Like you I would have thought that their refusal to offer another mortgage neutralised their claim for an ERC as you were trying to port the existing product.

 

I think you need to know why they won't lend on your new house, is a loan to value issue, income multiplier or back credit risk? Without this information it is difficult to comment with any accuracy.

 

I think the unfair contracts act may not help in this case as the erc is designed to recompense losses made by a lender if the product is cancelled prematurely and the reason for this is usually because the borrower has derived benefit from taking the specific product initially.

 

It may be that it was a fixed rate offering protection against interest rate rises, a tracker which saved you money compared to other rates or other benefits. The main reason for ERCs is to dissuade borrowers from jumping ship but in your case you don't want to leave so it might weaken their position in this particular mortgage.

 

See if you can find out why they won't lend and perhaps someone on here can offer more assistance?

[chucky399]

Hi,

 

The only reason they did not offer was because I had had too many searches carried out on my credit file. I had arranged finance for a new sofa, a new car and a kitchen. When you combined the searches for the mortgage offer and that of Halifax - which we used as a comparison - C&G determined that I was unsuitable for ,ortgage purposes - even though the Halifax didnt.

 

Does this help or hinder my case?

 

Chucky

[rickyd]

can't see that being the only reason. It falls foul of "treating customers fairly" legislation. There has to more to it than that.

 

Whilst its true that too many searches has an impact, we're talking 8 or more in a six month period. That would give the impression that you were hunting around for credit and being refused.

 

What you describe doesn't seem excessive at all.