Author: Anna Mayo

The mortgage lenders have been playing a dirty, but totally legal, game on exit fees. In reaction to the amount of people that now choose to switch mortgages to make the most of competitive interest rates, they have been responding by raising exit fees by as much as 450% in the last 3-5 years – what’s worse is, they haven’t bothered to tell the borrowers.

An exit fee is a charge that the mortgage lender enforces if a borrower leaves their mortgage before the end of the term. It’s also known as a redemption penalty. Now the Financial Services Authority (FSA) has seen what they’re up to, it’s making a move to end these practices.

When people sign up for a mortgage in the first place, the lender has to stipulate exactly how much it will cost to leave the mortgage early. That’s a legal requirement. However a loophole leaves the way open for lenders to increase that charge without informing the borrower, so they can decide to remortgage after five years and find they have to pay a lot more than they thought.

The Cheltenham & Gloucester are one of the culprits – their exit fee has risen from £50 to £225 over the last few years, and the Woolwich have done something similar, increasing the fee from £95 to £275. It’s the lenders’ way of cashing in on the activities of the ‘rate tarts’ i.e. people that switch mortgages regularly to make savings on their mortgages. They don’t charge enough to stop the rate tarts, but they do at least get a small portion of the proceeds.

The FSA is currently talking to the lenders to reach an agreement on this issue, which will hopefully be enforced and become practice by June 2006. The ideal outcome will be for exit fees quoted at the beginning to be fixed for the mortgage term, so whether you stay in the same mortgage for two or ten years, the exit fee will be the same as you were quoted.

This is a good opportunity to remind you that when you get a mortgage, you need to look at all the costs, charges and sometimes incentives relating to the deal, not just the interest rate. We have compared two similar looking deals from Northern Rock and Halifax to show you that the interest rate does not tell the whole story.

We have compared the two companies based on a 2-year fixed rate repayment mortgage for 25 years, exiting the mortgage at the end of the 2 year fixed period.

Northern Rock charges interest at 4.19%, has a 1.5% arrangement fee, £250 exit fee and no incentives.

Halifax charges interest at 4.39%, has a £499 arrangement fee, £175 exit fee and the incentive of free valuation and solicitors fees.

Ignoring the incentives available on the Halifax mortgage, it still works out a lot cheaper over the two years. Northern Rock costs a total of £14,671 and Halifax costs £13,864, so you will pay £807 less over two years with Halifax. This case shows that the interest rate is not the only thing you need to consider, you must calculate all the costs to get a true comparison.

You also need to consider how the interest works because that will also affect how much you pay. Mortgages that charge their interest on an annual basis cost more because you are paying interest, for 11 months of the year, on a balance that has already been reduced by your monthly payments over the year. If your interest is calculated daily then you are always seeing the benefit of these payments, and will pay a lot less.

When choosing a mortgage, it is essential that you look at the bigger picture, and a specialist mortgage broker can be invaluable to help you sort through the many variables you will come across. Read the small print and all the information they provide, charges are hidden within complicated terms and are usually associated with the following words: completion, reservation, application, booking, arrangement and early redemption – so make sure you take a proper look at the charges especially when you see these terms mentioned.

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