Summary

After years of lenders having a free hand to increase exit charges, the FSA steps in to restore fairness for consumers. This article explains.

Mortgages. Exit fees to be capped.

Michael Challiner 26/02/06

In the last 3 to 5 years we have seen rises of up to 450% in the exit fees charged by lenders when borrowers redeem their mortgage. But at last the Financial Services Authority (FSA) ha seen the light and is going to crackdown on these increases.

Lenders have been telling new borrowers about the exit fees currently charged, but the lender has retained the right to increase those charges at any time and without advising borrowers. This amounts to a free hand to increase these charges and many lenders have taken the opportunity gladly.

Take the Company A for example; they've increased their exit fee from what was £95 to £275. The lenders have clearly been trying to penalise those of us who regularly switch their mortgage to get the best interest rates – the so called rate tarts – and at the same time line their coffers.

However, the FSA is now in talks with the mortgage lenders to bring them to heal. The FSA wants fees to be fully disclosed at the outset and for the disclosed exit fee to be fixed for the duration of the mortgage. The FSA hopes to have agreed a binding undertaking from the lenders by June this year.

On a wider front, borrowers should always remember to take into account all the charges and money saving offers when working out which mortgage is cheapest for them.

To illustrate this point, let's say you wanted a 2-year fixed rate mortgage and were attracted by the offers from Company A and Company B.

Company A currently charges an interest rate of 4.19% plus a 1.5% arrangement fee and an exit fee of £250. Company B's interest rate is 4.39% with an arrangement fee of £499 and exit fee of £175. Within Company Bs package there's also a free valuation and free conveyancing that typically could save around £750. So which mortgage deal is the cheapest?

Taking a 25 year repayment mortgage for £100,000 and costing it over the first two years with redemption at the end of the second year, Company A comes out at £14,671. Company B comes out at £807 cheaper at £13,864. And this saving doesn't take into account the extra £750 valuation and legal savings offered by Company B. Therefore, assessed on this basis, the 4.39% headline rate offered by Company B is in fact the cheaper deal.

Another issue that will affect the true cost of your mortgage is whether the interest is charged on a daily, monthly or annual basis. On an otherwise like for like basis, annually calculated interest will always work out more expensive because for 11 months of the year, you are charged interest on money you have already repaid.

The best advice is to read all the small print! And remember that the lenders use all sorts of words to describe charges - application, arrangement, reservation, booking, completion and early redemption are all words to described charges or fees. Keep your eyes skinned!

Readers please note : You should undertake your own background checks before taking any action on any aspect mentioned in this article. Where the author has mentioned specific product details or given examples of how companies have reacted to specific situations, these should be correct as far as the author is aware when this article was written. In some cases additional background information not mentioned in the article has been used in obtaining the examples. Some examples or quotes may have been taken from information available in the public domain where all the background details may not be available. Insurers do change policy conditions and underwriting approach. They will view each situation on its own merits.

You should be aware that details of the topics written about within the articles can change. Therefore, always check out the current position before taking any action. You should also check that any action you are considering, or any proposed purchase, is suitable for your personal circumstances.