Fixed-rate stinger: Caroline Merrell on a home loan that involved high extra costs

THE HUGE costs involved in taking out a fixed-rate loan forced one borrower to abandon the idea halfway through the application process. That decision cost him the deposit on the fixed rate, a refund of a redemption penalty and the price of a new valuation report.

Stuart McCaffer, a branch controller with a whisky company from Glasgow, was moving home and wanted to take out a two-year 7.95 per cent fixed- rate loan with Yorkshire Building Society. He decided against taking out the loan when he realised the total costs could exceed pounds 3,000.

He required an pounds 83,000 loan, which represented 95 per cent of the value of the property. He went to the Yorkshire Building Society because his previous mortgage, for just over pounds 40,000, was with the society.

The redemption charge on his original mortgage was pounds 386 and he had paid mortgage indemnity premium of pounds 464 on the loan. The Yorkshire Building Society said that if he took a new mortgage out with them within six months, it would reimburse the redemption penalty. He also claimed that it said it would try and offset the pounds 464 mortgage indemnity premium against the new mortgage indemnity premium.

Mortgage indemnity insures the building society against the possibility that the borrower may default on the loan.

However, when he came to take out his loan he suddenly became aware of lots of extra costs attached to the mortgage.

For instance, the mortgage required a pounds 50 deposit, plus a pounds 200 arrangement fee. Mr McCaffer was also required to take out a buildings-and-contents policy with the loan, which was to cost a further pounds 1,150.

And to add insult to injury, when he came to press ahead with his application he found that the society could only offer a refund of the original redemption penalty and could not offer any reduction on the mortgage indemnity costs.

Mr McCaffer said: 'I did point out that the insurance charge was some pounds 700 more than the market rate, and was effectively increasing the fixed rate by 1 per cent.'

The insurance policy broke down to about pounds 30 a month for the buildings insurance, plus another pounds 70 a month for contents cover, which gave him pounds 25,000 worth of cover under all risks.

He added: 'One further point that is a particular bug bear for me is the mortgage guarantee premium. I know that building societies need to insure themselves against default when lending over 75 per cent of loan to value. However, why is the premium set at a fixed rate? Most insurance premiums are priced dependent on the risk attached. And also, why is it a one-off premium and not priced over the life of the loan?'

Mr McCaffer decided in the end to take out his new mortgage with the TSB, but he feels that the Yorkshire ought to reimburse him the pounds 50 deposit, the redemption penalty, plus the fee for the revaluation he was forced to undertake.

Yorkshire Building Society said that it was very unlikely that one of the mortgage indemnity insurers would be willing to offset the old premium against the new.

The society also said that the fixed-rate loan that he wanted to take out was keenly priced and, therefore, carried compulsory insurance. It said that the fact Mr McCaffer had taken his business elsewhere was his decision, and therefore it would not consider compensation.

Another potential fixed- rate borrower is stalling about taking out a fixed rate because he discovered that his building society intended to charge one month's interest as a redemption penalty on his existing mortgage, as well as the arrangement fee, before it would allow him to transfer.

Gus Zielinski, a Bristol & West borrower, who works for a London film processor, wanted to take advantage of a 6.75 per cent four-year fixed-rate loan from the society. The society said it would charge him one month's interest, pounds 567, plus the normal pounds 300. He said: 'Anyone coming in off the street would only be charged the arrangement fee.' The society said the charge reflected the administration involved.

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