Mortgage Clinic: 'Can my bank impose these charges on me?'
Wednesday 18 July 2007
Q. 'When divorce forced me to sell my home and downsize, my building society demanded that I pay a penalty. Admittedly, I had a three-year fixed-rate mortgage, and was only two years into it, but I took the new mortgage with the same company. In all, I've paid out £3,100. Surely that's unfair'.
HN, by e-mail
A. It seems unfair to charge you a penalty for changing to a smaller mortgage, especially as your new loan is with the same company.
However, redemption penalties are an inevitable feature of fixed-rate mortgages. When a bank or building society arranges a fixed-rate loan, it almost always funds that loan by borrowing the money at a fixed rate in the City. If you pay off your loan, or even part of the loan, early, the lender is left out of pocket, which is why they have charged you a penalty.
This is why it is so important to be clear about the rules that apply to a mortgage before you sign up for it; this is also why the FSA now has strict rules about the information a lender has to give you before you sign.
"Always read the small print of any mortgage deal before signing up," says Melanie Bien, director at mortgage brokers Savills Private Finance. "Pay attention to early-redemption penalties, as these are impossible to get out of, even if you have to change your mortgage through no fault of your own."
Check the terms of your mortgage carefully and also look at the advice you received from your lender.
It is worth asking why you were advised to redeem all of the original mortgage, if this is what you did, rather than redeeming part of it and then transferring the lower balance of it to the new property. Usually, lenders will only charge a redemption penalty on the amount you pay back, not the whole sum.
It might be that your mortgage was not that flexible, or there were other circumstances that stopped you "porting" your mortgage to a new property.
Anyone taking out a fixed- rate mortgage should check whether they can transfer the loan to another property, and also look for other features, such as the ability to make overpayments or redemption penalties that fall in each year of the mortgage: several lenders' fixed- rate deals do this.
Ms Bien also cautions that it is important not to fix your loan for longer than you are comfortable with.
"There are penalty-free mortgages, so if you have any doubts about what is likely to happen in the next few years, it might be worth opting for one of these and then switching to a fixed or discounted rate once you are more certain," she says.
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