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In This Magazine
Mortgage Outfits Challenged On Exit Fees
You might have heard of an exit fee. It is the charge that the mortgage lender makes a person pay if they want to get out of a money borrowing agreement before the end of the term. Another name for it is a redemption penalty.
Well mortgage lenders are making large amounts of money on these exit fees at the borrower’s expense. In fact, as more and more people have tried to ditch their mortgage when a better deal comes along in the last five years, the money lenders have been increasing these exit fees by up to an unbelievable 450%. If you think that’s a staggering fact, consider this: In some cases they do not even mention it to the borrower.
The Financial Services Authority (FSA), however, is taking a stand.
What it plans to do is strike up an agreement with money lenders during 2006 in an effort to make these outfits quote the exit fees at the beginning of any mortgage agreement. The price someone pays to get out of the mortgage will then be fixed for that mortgage term.
That is, the cost of exiting an agreement will be the same if you get out of a mortgage after three years or after eight years.
It is actually the case that when someone enters a mortgage, the lender is legally required to say the exact costs that will be incurred by leaving the mortgage early.
But the problem is that there is a loophole in the law which allows organisations to increase the exit fee during that agreement without telling the person borrowing the money.
Take Cheltenham & Gloucester for an example. Here’s a case where the company’s exit fee has rocketed from £50 to more than four times that price - £225. That has happened in just a few years.
Another company, Woolwich, have pushed up the fee from £95 to £275.
You could argue that the lenders are doing this as retaliation against people who regularly swap their mortgages in an effort to save money on interest rates. The money is still not enough to stop these people moving their money around, but it means the money lenders get a nice monetary compensation at the end of it.
It takes this talk of exit fees to focus one’s mind about carrying out the necessary research when it comes to taking out a mortgage in the first place.
There might be some people out there who gloss over the fine print and miss information about many of the costs, changes and incentives connected to the agreement.
Do not just consider the interest rate – you need to look at everything.
Here are two very similar deals with the companies Northern Rock and Halifax.
You take out a repayment mortgage with both companies for 25 years, both based on a two-year fixed rate. After two years you exit both of the deals.
Northern Rock has its interest rates at 4.19%. The arrangement fee is 1.5% and the exit fee is £250 with no incentives.
With Halifax you pay an interest rate of 4.39%, a £499 arrangement fee along with a £175 exit fee. The incentive you have with the deal is free valuation and solicitors fees.
Even without any incentives, the Halifax deal is much cheaper – by £807 – over two years, despite the fact that it has higher interest rates.
The Northern Rock mortgage is going to be £14,671 and the Halifax mortgage is £13,864.
So when you take out a mortgage, do your homework. While the rules around exit fees may be about to change which will put an end to the game that money lenders can play at your expense with price hikes, if you put yourself in a position where you do not want to pull out of your mortgage because you have the best deal, exit fees will never have to be something you should worry about. And the money lenders will not be making a nice little sum of money when you leave the deal at your expense.