Mortgage exit fees and your mortgage

More mortgage lenders are giving in and scrapping or reducing mortgage exit fees ahead of the deadline of 1 August 2007, when they have to "comply or explain" to the financial regulator what exactly they are charging for.

Halifax Bank of Scotland (HBOS) is the latest to dump the controversial fees in an eleventh hour change of heart, joining Bank of Ireland, Bristol & West, Cheltenham & Gloucester, Northern Rock and Standard Life, which have all totally abolished their fees. Kent Reliance, Skipton, Portman and West Bromwich have cut theirs back, while Coventry will trim its fee from £195 to £125 on 1 August 200y. A few lenders, including HSBC and ING, have never charged exit fees.

The financial watchdog, the Financial Services Authority (FSA), is due to issue a report on mortgage exit fees later this week, and is expected to be highly critical of the banks. Some experts are forecasting that it could order lenders to reimburse borrowers for any fees above a level it deems to be fair - a move that could cost the banks and building societies up to £2 billion.

Mortgage exit fees are one of the sneaky charges imposed by banks and building societies to boost their profits, as competition has forced down headline rates. It used to be free to pay back the money you had borrowed to buy a house. In the old days there might have been a charge of a few pounds for "sealing" the mortgage deed (a legal practice no longer required), or a few coppers for administration. But you were more likely to receive a letter of congratulations on completing the payments on your home than a further bill for an eye-watering sum.

This way to the egress... at a price

All that changed when tooth-and-nail competition set in across the mortgage market. As lenders fought for market share and pushed down interest rates, profit margins came under pressure. The situation was exacerbated by "rate tarts" who switched mortgages every couple of years to take advantage of the best deals. So the lenders looked for money-making wheezes, and in came stealth charges such as ballooning arrangement fees, burgeoning booking fees and whopping exit fees.

The level of these sneaky fees has shot up in the last four years, from an average of less than £100 to almost £300. Among the highest fees have been those charged by Alliance & Leicester, which nearly doubled from £150 to £295 in less than three years.

But consumers have held up the yellow card and called the charges unfair. Not only do the charges not represent the true cost to the lender of terminating the mortgage, but they have often ridden roughshod over contracts that borrowers had signed up to when they took the mortgage out.

The FSA stepped in last January, and told lenders to sort out their terms and conditions by 31 July 2007. They were given four choices: to charge no fee; reduce the fee; charge the original quoted fee; or increase the fee and be prepared to justify the charge.

Meanwhile, disgruntled customers have been claiming back excessive fees they have already been charged. Spurred on by victories in claiming back excessive bank overdraft charges and credit card charges, they have been demanding the return of their cash.

If you have paid off your mortgage and been charged more than the sum stated on your original loan agreement, write to your former lender and ask for your money back. If you fail to get a result you can go to Financial Ombudsman Service.

If the FSA rules, however, that lenders have to pay back unfair fees already charged, you may find you only need to confirm the address to which the refund cheque should be sent.

READ MORE: Say a fairer goodbye to your mortgage lender

31 July 2007 © Moneyextra.com

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