Consumers turn on mortgage lenders in battle to beat the banks

Mortgage lenders are the next target in the campaign against unfair charges after it emerged they could owe homeowners at least £190m in excessive fees. Banks and building societies are bracing themselves for a flood of refund requests from customers who have paid a mortgage-exit fee after changing borrowers or paying off a home loan.

The fees are the latest front in the battle highlighted by The Independent to reclaim some of the £4bn in overdraft charges extracted by Britain's high street banks from their customers over the past six years.

Related articles

• Alliance & Leicester chief in surprise exit as profits rise
• Search the news archive for more stories

Banks and building societies have until next week to decide how to respond to a ruling by the Financial Services Authority (FSA) that exorbitant rises in exit fees - due when a borrower pays off a loan or switches to a new lender - must be justified.

Exit fees - in effect administration charges to complete the paperwork on a mortgage - have risen from £50 10 years ago to up to £295. Insiders estimate the actual administrative cost of closing a mortgage is about £65.

Exit fees are different from early redemption penalties, which are charged when a borrower leaves a mortgage deal before an agreed date. It is expected that the majority of lenders in Britain's £346bn mortgage industry will revert to a lower charge or abolish their exit fee.

Homeowners who were charged more than the exit fee quoted in their original mortgage agreement will then be able to reclaim the difference at an average of £100. It is estimated that up to 80 per cent of the 2.3 million people who have remortgaged in the past two years will be able to claim - leaving lenders facing a bill of at least £190m.

Martin Lewis, the founder of Moneysavingexpert.com, who has led the campaign against overdraft charges since November, said inflated mortgage-exit fees were one of many ways lenders have been trying to boost their income in the fiercely competitive home loan market.

He said: "Lenders have been trying everything they can to lower the headline interest rate they offer. They have drastically increased administration fees as a result and one of the hidden tricks has been to raise exit fees. But, while there is nothing you can do about the high fees to buy into a mortgage deal, there is now something you can do about what you pay when you end it."

Mr Lewis, whose website received more than 100,000 inquiries yesterday to download template letters that requested a refund of overdraft fees, said there had already been 30,000 downloads for exit fees.

Several mortgage lenders have already set aside contingency funds to meet the cost of anticipated refunds.

Ray Boulger, of the mortgage broker Charcol, said: "Exit fees offer a way for lenders to punish borrowers who take their business elsewhere. Having failed to offer borrowers attractive enough terms to retain their business, it is hard not to come to the conclusion that lenders see consumers as a soft target from whom to extract a fee well in excess of the costs incurred when a mortgage is redeemed."

The FSA ruled last month that borrowers must be told more clearly what exit fee they will pay or how that fee might increase fairly. The watchdog said lenders must tell it by 28 February whether they will revert to the original charge or abolish it completely. Those seeking to continue charging the increased exit fee will have to justify it or face a reprimand. The Council of Mortgage Lenders said it endorsed the FSA's position.

* Lloyds bank will charge credit card customers an annual fee of £35 if they use their cards irregularly. The bank, which is expected to report £3.7bn in annual profits this week, said the charges would affect less than 1 per cent of customers who do not use their cards often and pay off the balance in full.

Exit fees

Provider/10 Years Ago/Now

Abbey £50/£225

Alliance & Leics £90/£295

Bank of Scotland £50/£195

Bristol & West £50/£195

Cheltenham & Glouster £35/£225

Halifax £55/£225

HSBC none/none

Nationwide £67/£90

NatWest £65/£225

Northern Rock £75/£250

RBS £80/£225

Woolwich £50/£275

Yorkshire none/£195

Source: Moneyfacts

Compare top offers on 0% balance transfer credit cards at Independent Compare