Time’s up on excessive exit fees

The deadline has now passed for mortgage lenders to decide what they are going to do about their exit fee to meet the Financial Service Authority’s (FSA) requirements.

Ray Boulger, senior technical manager at leading independent mortgage broker John Charcol, comments:“Even after the deadline, we are still waiting to hear final confirmation from several major lenders, including Alliance and Leicester, Scottish Widows and Mortgage Express, which indicates that some are going to tough it out with the FSA. A typical exit fee is around £200 which has risen a staggering 33 per cent in the last two years. There is however now no hiding place for lenders. They have to be open about what they are doing and will have to be up front in justifying these excessive fees."

Most lenders are either:

1. Abolishing their exit fee completely

2. Reducing it

3. Abolishing it but replacing it with another fee of the same amount but with a different mane

4. Doing nothing

One lender (Principality) has increased their exit fee by £17 to £152. Barclays/Woolwich have confirmed they are leaving their exit fee unchanged at £275.

Boulger continues, “Cheltenham & Gloucester/Lloyds TSB led the pack in the first camp by being the first major lender to announce they were abolishing the fee and were followed by a number of other major lenders. Lenders falling into the second group have generally reduced their fee to between £125 and £145.

“Perhaps the most cynical group, which nevertheless are meeting the FSA’s requirements, are those lenders which have abolished the exit fee but replaced it with a new fee for an identical amount but called it something different. The new fee names either no longer refer to the costs of closing the mortgage, or are stated to cover something else difficult to measure.”

Boulger continues, “I am intrigued as to the line of defence taken by those lenders who have not reduced their exit fee and therefore still charge a fee well above the £125 - £145 level other lenders have reduced theirs to. Presumably, having decided where to reduce the fee to, those lenders are comfortable that they can demonstrate to the FSA the new lower amount is reasonable in relation to their costs when a mortgage is redeemed. This would suggest that lenders whose fees remain well above this level, in some cases double, are either charging much more than a realistic cost, or they are very much more inefficient in carrying out this particular function, compared to other lenders.”

Boulger continues, “Those lenders who have abolished the exit fee are saying that customers who received their mortgage offer before the fee was abolished will have to pay the fee quoted on the most recent mortgage offer. This is fair enough on the basis that borrowers accepted that mortgage offer.

“There is however an interesting point here, which applies to most lenders who have either abolished their exit fee, replaced it with another fee of the same amount, or reduced it by a significant amount: they did not feel able to justify the size of the fee to the FSA.

“This seems to me to be tantamount to admitting that the now abandoned fee was unfair. If it was unfair it may well have contravened the Unfair Contract Terms Regulations. It may therefore be that lenders do not have the legal right to collect this fee, even from those borrowers who accepted it as part of their mortgage offer.”

Lenders will not take the loss of income from the elimination of, or reduction in, their exit fee lightly. Profit margins on most mainstream mortgage lending are very thin and the only question is how the lost revenue will be recovered. The three most obvious ways are:

Increase one of more existing fees.

Introduce a new fee but don’t claim it relates to something specific like the cost of closing down a mortgage.

Increase some or all interest rates (if applied across the board this would only need to be by about 0.05% to recover the average revenue lost even when the exit fee has been abolished).

Boulger concludes, “Many borrowers who have redeemed a mortgage in the last 4 years – i.e. since excessive increases in exit fees started to be imposed - will have a very strong case for seeking compensation from their lender. However the problem could be that many will probably have discarded the documentation for a mortgage they redeemed some time ago. As a result borrowers are less likely to make a claim for compensation, although providing they can remember who they had a mortgage with, they can still claim.

“Around 10 million mortgages have been redeemed in the last 4 years but the number of people who claim compensation will no doubt be largely influenced by the amount of media coverage this topic receives. However, I would estimate that the total compensation payable will be at least £50m and probably in the region of £100m.”