Payment pitfall of the fixed-rate mortgage: Buyers are left out of pocket if a house purchase falls through

HOUSE BUYERS are snapping up fixed-rate mortgages so they can lock into low-cost loans. But these deals can have an expensive sting in the tail if the buyer has to pull out of the deal at the last minute.

Maxine and Alan Sykes of Glossop in Derbyshire applied for a fixed-rate loan with Gloucester Building Society recently. They had received an offer on their house in Hadfield, Cheshire and were confident that the deal would go through.

They applied for their loan with the C&G and sent off cheques for the valuation, which cost pounds 110, an administration fee of pounds 50 and a pounds 200 fee for the fixed-rate loan. A week after handing over the money their buyer pulled out.

'We got back the valuation fee but not the rest of the money,' Mrs Sykes, who works as a home help, said.

'It is like losing a week's wages or a month's mortgage payment,' she added. 'I don't think I would go for a fixed rate again. We had one on our last property but interest rates fell after we took ours out so we did not really win.'

Mrs Sykes said she was aware that the C&G stipulated that the fee on the fixed-rate loan was not refundable. The society had offered to keep the mortgage offer open for three months, without the need to pay the fee again, but the Sykes could not sell their house in time, so missed the deadline.

A spokeswoman for the C&G said that fixed-rate loans carried fees because lenders needed to discourage borrowers from pulling out of the deals and also to reflect possible losses. Funds were bought on the money markets and lenders would be exposed if customers did not take them up once they were earmarked.

Branch managers could keep mortgage offers open at their discretion so that borrowers did not automatically lose their money if a sale fell through. 'There is no hard and fast rule about this.' she said.

Had Mr and Mrs Sykes arranged their mortgage through the National Westminster, rather than the C&G, they would have been pounds 250 better off. Unlike the other large lenders, NatWest waits until completion before it charges a fee. So if a house purchase falls through the prospective borrowers do not have to pay anything by way of an arrangement fee. The pounds 250 fee is waived for first-time buyers.

Barclays Bank would also have been more helpful to the Sykes than the C&G. Barclays charges a total of pounds 300 in administration fees for setting up a fixed-rate mortgage, but only half of this is payable before completion. Barclays borrowers who also take out an endowment or a pension policy with the bank to support the mortgage do not have to make the second payment of pounds 150.

However, if the sale for which the funds were originally intended falls through, then the borrowers are given only six weeks in which to complete on another property. If they do not manage it they forfeit the pounds 150 that they have already paid.

The least generous of the large lenders, in these terms, is the Halifax. If the original sale falls through the would-be borrowers cannot normally transfer the fixed-rate mortgage agreement to another property. The Halifax makes an exception in cases where structural defects or valuation problems have blocked the deal. But even in these circumstances the borrowers have only one month in which to find another property.

Lloyds Bank always allows borrowers to transfer the agreement to another property if the original purchase falls through. There is no set period in which completion must take place. 'In theory it could be several months,'said a spokeswoman.

Midland has no objections in principle to the funds being used for a different property from that on which the funds were originally agreed. But the funds must be drawn down within four months of the original agreement with the prospective borrower. In effect this will mean that many people will find it difficult to meet the deadline and not lose their arrangement fee.

The Nationwide and the Abbey National both, in effect, give their borrowers several months of grace to complete on a second property if the first deal falls through. The Nationwide insists that deals are completed within three months of the time the particular mortgage product is taken off the market. This could be weeks or months after the individual concerned has been given his mortgage offer. And when it launches a new fix, the Abbey National sets a date several months later by which time all the funds have to be drawn.

Most lenders ask their borrowers to pay their arrangement fee when they make their mortgage application. Once the money changes hands it will never normally be refunded unless the lender refuses to grant the loan - either because the borrower's references have thrown up a problem or because the property turns out to have been overvalued.

Most lenders say that the fee is a way of forcing customers to commit themselves to their borrowing agreement. But even so the Abbey estimates that up to a third of fixed-rate mortgages are either never taken up or are redeemed early.

----------------------------------------------------------------- Table: FIXED-RATE MORTGAGES ----------------------------------------------------------------- Fixed rate Mortgage Arrangement until rate % fee pounds ----------------------------------------------------------------- Abbey National 31/1/98 7.99 300 Barclays 30/6/98 8.55 300 Cheltenham & Glos 5 years 8.50 250 Halifax 31/7/98 8.25 250 Lloyds 5 years 7.99 250 Midland 31/7/98 8.25 250 NatWest 30/4/98 8.49 250 Nationwide 5 years 8.99 250 -----------------------------------------------------------------

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