SJ Berwin, a firm of top City lawyers, says the small-print penalties at issue could be unlawful under the 1994 Unfair Terms Act, and the Consumers' Association says the terms could be in breach of the mortgage industry's own code of conduct. The penalties are also likely to be frowned on by a Government committed to tightening up the regulation of mortgages.
Home loans nowadays frequently carry redemption penalties to deter people from taking advantage of a special rate that lasts a limited period and then switching as soon as this rate reverts to a lender's standard rate. But many societies also reserve the right to levy a second, additional penalty of three months' interest or more if a borrower should switch mortgages before the end of the term. These second penalties are hidden in the societies "rules for members" that are only sent out at the formal mortgage offer stage and are not made clear when borrowers are choosing a loan.
The societies with such additional penalties include the Bradford & Bingley, Coventry and Portman, and Skipton, all of which says that as mutuals they offer their customers a better deal than the banks and would- be banks.
In some cases the penalties could amount to as much as 5 per cent or even more of a loan's value. The penalty clause is similar to that which the Northern Rock building society tried to introduce on its existing mortgages a couple of years ago. The Northern Rock eventually backed down.
Neil Walkling, senior researcher at the Consumers' Association said: "People getting into a mortgage situation assume they will be told about all the terms and redemption penalties up-front. It is therefore reasonable to assume they will not be hit with another three months of penalties that the lender can impose if it feels like it."
He added that these clauses may be in contravention of the Council of Mortgage Lenders own Code of Lending Practice, which is due to be introduced next month. The code demands that any charges or redemption penalties be stated when the customer makes his or her purchase decision.
Alex Leitch, solicitor-advocate at SJ Berwin, says if these extra charges were imposed they could be seen as punitive, and therefore in breach of the Unfair Terms in Consumer Contract Act. He said that if consumers believe such clauses are unfair, they can refer the matter to the Director-General of Fair Trading.
The hidden clauses are based on the Building Societies Association model rules, although in recent years many building societies have updated their rules and expunged the clause. Bradford & Bingley, West Bromwich and Skipton all say the clauses have not been enforced in recent memory. A spokesman for Bradford & Bingley said the society's version was designed in case there was a run on the society. Both he and a spokesman for Portman said in future the rules were likely to be made more upfront, or deleted altogether. West Bromwich and Skipton say the members' rules are superseded by the mortgage offer itself.
But this is not made clear in either society's literature. Skipton said it had extended its rule from three months to 12 months in the early 1990s in order to give itself leeway to charge higher product-specific redemption penalties.
q Dido Sandler works for 'Financial Adviser', a specialist publication.Reuse content