Mortage exit fees - this way to the egress?

If you are lucky enough to pay off your mortgage or plan to redeem it to switch to get a better deal, you may find that getting rid of your current mortgage isn't quite as painless as you might think. As well as any early repayment charge - normally charged if you repay your mortgage during a special offer period and up to around 3% of the original sum borrowed - you may also be charged extra administration fees.

These fees come under a variety of names including exit fees, administration charges, sealing fees or deeds-release fees. Around £195-£295 now appears to be standard and they can be higher. Not a huge sum of money you might think but when you realise that this charge has jumped by 400% over the past 10 years from around £50 it makes you wonder what you are paying for especially as inflation has never been higher than 4% annually during this period and is currently 2.4% (Retail Price Index).

If you still have a long time to go on your mortgage perhaps 10 or 20 years - beware, this fee could be astronomically high by then! The problem is many of us don't object to paying the fee but would like to know exactly what it's for.

Exit fees supposedly cover administration costs for closing down the mortgage and for obtaining your property deeds from the Land Registry and returning them to you. Whereas in the past this was a manual task, property deeds are now held electronically and, as we all know, this should cut costs. Yet not only have these fees being going up, more and more lenders charging them.

Rachael McKay, mortgage analyst from Moneyfacts, believes that lenders charging these fees are effectively printing their own money. These fees are not fixed at the start of your mortgage so that the cost when you repay your outstanding balance can be a surprise. You can find out about them in the small print - hardy compulsive reading - but because they are not fixed, it means that there is no way of comparing them.

What is really irksome about exit fees is that there appears to be no benefit to us whereas at least with an agreement fee at the start of the mortgage you can see where your money is going - you pay the fee and get a good deal of either a discount or a fixed interest rate for a set period of time.

A 25 year term but lasting just four years

With the average mortgage now lasting only four years and 66% of mortgages in 2004 under two years old, it means that more people are switching their mortgage more often and incurring this additional cost. At the end of 2005 remortgaging was up 158% since 2000 compared to 52% of all products and services, squeezing lenders' margins to the limit.

The mortgage market is highly competitive and because lenders are now under pressure to give incentives to new borrowers they have had to increase exit fees to claw back the cost of winning new clients. Raising the fee is also a way of deterring us from switching. If you are thinking of remortgaging now, you need to add up all the fees involved to work out if you would be better off.

Some lenders are taking note of this change in the market and are even using the fact that they don't charge exit fees in their marketing spiel. Intelligent Finance has a non-offset tracker mortgage with no exit fees and an interest rate of 5.15%. In addition, it said that the exit charges of 2% of the initial mortgage balance will only be made during the discount period on its other non-offset tracker mortgages.

Nationwide does not charge exit fees if the mortgage is redeemed within the last 10 years of its term or if you are switching to another of its deals.

An increase in complaints from consumers, the press and mortgage commentators about these fees has now come to the attention of the Financial Services Authority (FSA). It is investigating the fees and is concerned that some lenders are potentially offering unfair contracts because they do not fix these fees over the term of the contract and change them over time as they wish. The FSA is currently discussing the practise with several lenders and may well be publishing a statement shortly.

If the lenders, as a result, make an undertaking to change how they charge exit fees. details will be jointly published with the Office of Fair Trading at their websites and be given to the press.

The Financial Ombudsman Scheme (FOS) said that in most cases, disputes over exit fees are resolved between the borrower and the lender. If you feel you are paying too much in exit fees when redeeming your mortgage, you should first contact your lender and ask them to justify the fee and explain how it is made up. Write a letter making your complaint as clear as possible and enclose copies of any relevant documents. If you are not satisfied with the response you should contact the FOS, which is a free independent adjudication service.

29 March 2006 © Moneyextra.com

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