Are exit fees on the way out?

Get-out fees, long accepted as part of the mortgage process, are now coming under scrutiny, writes Stephen Pritchard
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The Independent Online

Mortgage exit fees, until recently, attracted little attention from home buyers. The costs were in most cases minimal and covered such administrative work as returning property deeds and closing the mortgage account.

But these fees are rising. Abbey increased its exit fees last year from £95 to £225; Skipton Building Society from £75 to £175. Woolwich charges £275, Cheltenham & Gloucester £225, the Alliance & Leicester £295.

Such fees can no longer be described as nominal. But because they are not levied until the owner pays off their loan or switches lenders, it is easy to overlook them. This has prompted the Financial Services Authority (FSA) to ask whether the charges are fair.

Why are exit fees rising?

Lenders argue they face rising costs when home owners pay off loans. But these costs are more likely to come from owners who remortgage after just a few years. Higher fees could deter somefrom remortgaging. The lender will at least recoup some of their lost profits through the exit fee; and higher fees overall allow lenders to keep their headline interest rates low. In reality many costs associated with closing a mortgage are falling.

"Considering that deeds are no longer a legal requirement and that most of the administration is now conducted online it will be very interesting to see how lenders justify these fee increases to the FSA next month," says Louise Cuming, head of mortgages at Moneysupermarket.com.

Do all lenders charge exit fees?

For practical purposes, yes. Some call them "sealing fees" but they are the same as exit fees in practice.

But the amount varies. Nationwide, for example, charges £90, the Alliance & Leicester £295 and Barclays and the Woolwich £250.

Andrew Hagger of Moneyfacts says many fees have risen much faster than inflation, and have no direct relationship with the loan amount. Borrowers with smaller loans tend to pay exorbitantly more in fees.

Some lenders, however, do not levy fees when a home owner repays the mortgage at the end of the term, rather than because they are remortgaging. Nationwide, for example, charges no exit fee for borrowers with 10 years or less left on their loans.

So why are the regulators concerned?

The FSA has a general duty to ensure consumers are treated fairly. It is set to look at whether the recent rises in fees are fair, and relate to the lenders' actual costs.

But lenders are also coming under scrutiny because exit fees are usually not fixed at the point when a home buyer takes out a mortgage. With no effective controls or contractual guarantees, lenders can raise fees at will.

Exit fees also make it hard for borrowers to know exactly how much a mortgage will cost in total. A significantly higher exit fee could make a deal unattractive, especially for shorter-term fixed rates. The assumption there is that most borrowers will change mortgages once the fixed period is over, and so face paying the fees.

So far, just the Alliance & Leicester and Northern Rock have fixed their fees from the start of a contract. But their fees are already among the more expensive.

"It is hard not to conclude that lenders see existing borrowers as a soft target with little, if any, bargaining power," says Drew Wotherspoon, spokesman for mortgage brokers John Charcol.

What, if any, action can the regulators take? And what can borrowers do?

The FSA has asked a number of lenders to justify their charges. It could use the Unfair Terms in Consumer Contracts Regulations 1999 to ensure that lenders fix the amount of any exit fees at the start of the contract.

For now, there might be some scope for those home owners who have recently paid high exit fees - and whose original contracts had lower fees - to ask for money back. And those taking out new mortgages should study the small print before taking a loan.

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