Mortgage Lenders Exit Fees

For some time there has been complaints about the size of fees a mortgage lender can charge a customer for changing their mortgage provider. The feeling is that these fees have been increasing over the years and that whilst some lenders may have promised low fees to borrowers some years ago, they have reserved their right to increase the fees. These comments apply equally to the mortgage and remortgage market.

A recent Financial Times article (February 2007) says that these fees have been increasing over the past decade. To begin with most were around £50 but that now some of the high street names are charging exit fees of up to £295. This is thought to far exceed the administrative costs actually incurred. The writer can see that inflation must have pushed costs up but we all want value for money out of any service and why offer mortgages at a low cost if other charges are going to deteriorate from a good deal.

The situation has reached the level where the Financial Services Authority has become involved. 

To begin with let us include a simple description of what an exit fee is.  If you want to repay your mortgage early, perhaps because you have found a better deal in the market place and want to remortgage, then often under the terms and conditions you have with your lender they have the right to charge you a fee for exiting the mortgage early. To be fair to lenders, they work their charges out so that over the period of the mortgage they cover all their administration costs. So if you want to payback you mortgage early the lender may not have covered all his costs by that time. So the exit fee is a way of the lender covering their administration costs for the transfer. Exit fees are different from a penalty fee charged by a lender because they gave you a special rate subject to you staying with them for a minimum number of years.

The FSA state that most lenders contracts allow them to change these rates at their will. This is understandable to some extent as a mortgage is over many years and inflation will take place. However the FSA feel that in some cases mortgage and remortgage lenders have been increasing these exit charges at rates which are not justifiable. This they think is unfair.

After consultation with the Council or Mortgage Lenders the FSA have issued a Statement of Good Practice which has also been agreed by the Office of Fair Trading. So plenty of regulatory muscle has been involved.

The FSA has asked lenders to decide by the 28th February 2007 if they are going to:

• charge no fee;
• charge the original fee (usually the fee shown in the contract when the borrower first took out the mortgage or when they last changed their mortgage);
• charge a revised fee; or
• charge their current increased fee.

The FSA have indicated that they may wish lenders to justify their position if they select the last option or if they select to revise their fee in a direction which is higher than the original indicated fee.

The FSA have said that they would expect lenders to treat past customers in the same way as they would treat current customers. So if a lender has elected to reduce its charges to existing customers then the FSA would expect that lender to refund the difference if a past customer complains over the exit fee they paid. Obviously each case would need to be dealt with on its own merits but the Financial Times indicates that some lenders have already started to reduce their exit fees and at least one lender has set aside money towards the costs of any future pay outs.