Back in January, the Financial Services Authority (FSA) told mortgage lenders they had to get their houses in order regarding mortgage exit fees by 31 July. But now the deadline has been and gone, what has happened?
To re-cap, the regulator was responding to concerns that exit fees had been increased unfairly over the past few years, so consumers were being charged higher exit fees than they had expected to pay.
The exit fee charged by lenders is supposed to cover the costs when borrowers pay off their mortgage or switch to another lender. However the size of the fees has risen significantly over the past few years with some lenders now charging twice the fee they charged five years ago. Critics argue the increased charges are simply a money making machine and consumers are being unfairly treated as a result.
Following a backlash from the industry and the press, the FSA told lenders they had to decide what they were going to do about exit fees going forward. Essentially they had four options; charge no exit fee, charge the original fee (i.e. the fee stated when the mortgage was taken out), charge a revised fee or charge their current increased fee. Firms were also expected to treat past customers complaining about exit fees they had paid in the same way as current customers. So if the lender announced it was lowering their fee to its original level, any past customer who had paid a higher fee could expect a refund of the difference between what they paid and the original exit fee.
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Any lenders not putting out a satisfactory response by 31 July or opting for the latter two options – charging a revised fee or charging their current increased fee – could potentially have the FSA to answer to, and be forced to justify the size of their exit fee. The FSA has stated exit fees must ‘represent the true costs of the lender’s administration services’. But it is hard to see how they can all do this when – as of 31 July – exit fees range from zero to £295.
However, the FSA generally seems happy with lenders’ response to the Statement of Good Practise issued in January. After the deadline passed, it analysed a sample of results and concluded that most major lenders had opted either to charge a fee that cannot be varied during the lifetime of the mortgage, or to remove the exit fee altogether; meanwhile other lenders will charge an exit fee which reflects the administrative costs when the client exits the mortgage.
Clive Briault, FSA managing director of retail markets, says: “What we are seeing achieves our principal aim of stopping customers from being surprised by unexpected increases in these fees. Customers will know when they sign up for a mortgage what fee they will pay on exit, or should be given a clear idea of how the fee might be varied fairly. We will continue to monitor closely how firms treat their customers in this area.”
The position as of 31 July
Some lenders left their announcement on exit fees pretty late. With just days to go, the UK’s biggest mortgage lender HBOS confirmed it would be scrapping mortgage exit administration fees for new customers from 31 July, while existing customers would pay the fee quoted on their most recent mortgage agreement.
Other lenders adopting the same stance include Northern Rock, Standard Life Bank and Cheltenham & Gloucester (C&G). HSBC, ING Direct and Staffordshire Building Society were already not charging an exit fee.
“C&G’s fee of £225 was in line with the average of the market, but it has shown a steady increase over the last 10 years, increasing almost six-fold from £40 in 1997,” says Lisa Taylor of analyst Moneyfacts. “On the face of it, it’s great news that lenders are taking the FSA enquiry seriously. It’s only right that borrowers should not be faced with unknown fees, or charged amounts that bear little relation to the cost actually involved.”
Those lenders who have abolished the exit fee are saying that customers who received their mortgage offer before the fee was abolished will have to pay the fee quoted on the most recent mortgage offer – which could be said to be fair on the basis that borrowers accepted that mortgage offer.
Some other lenders have reduced their exit fees, although not down to no fee at all. GE Money Home Lending announced that exit fees for both its iGroup and First National brands would be cut by nearly 50 per cent. Customers in England, Wales and Northern Ireland will now pay £110, down from £200, and Scottish customers will pay £195, down from £255.
Portman Building Society and The Mortgage Works, its buy-to-let subsidiary, will reduce their exit fees by £50, from £195 to £145, with effect from the end of January. West Bromwich, Coventry and Kent Reliance building societies also reduced their fees.
Ray Boulger, senior technical manager at John Charcol, says an interesting point is that lenders that either abolished or reduced their fees must have felt unable to justify them to the FSA.
“This seems to me to be tantamount to admitting that the now abandoned fee was unfair. If it was unfair, it may well have contravened the Unfair Contract Terms Regulations. It may, therefore, be that mortgage lenders do not have the legal right to collect this fee, even from those borrowers who accepted it as part of their mortgage offer.”
Not all good news
However it is not all good news for borrowers, as some lenders have sought ways to get round the FSA’s clampdown by renaming the exit fee as something else. Take the Bank of Ireland Group, which includes Bristol & West and Giraffe, for example; it claims to have scrapped the exit fee but has introduced another £195 fee – the same amount as the exit fee – and labelled it the ‘core fee’, which can be paid upfront at the beginning of the mortgage or added to the loan.
“This has two upsides for the lender and none for the consumer,” says Louise Cuming, head of mortgages at price comparison website moneysupermarket.com. “Lenders with a new ‘core fee’ are allowed to say they don’t charge an exit fee and they can charge the fee upfront. If they add the fee to the mortgage it has the added impact of attracting interest.
“New charges will hit the consumer hard at a time when mortgages are becoming less affordable, yet the lender could use the ‘spin’ of marketing a ‘no exit fee’ approach.”
Abbey, the country’s second largest lender, changed the name of its exit fee – currently £225 – to a ‘mortgage administration fee for providing, maintaining and closing a mortgage’. It has also said that it reserves the right to increase the fee each year in line with retail price inflation.
Commentators said that if Abbey had not renamed the fee, it would have been forced to prove that any increases reflected the true cost of closing a mortgage.
Bradford & Bingley is another lender that could be accused of a mere name change. It has also scrapped the exit fee and replaced it with a ‘mortgage administration fee’ of £250 which also covers other charges customers might – or might not – face.
A spokesperson for Bradford & Bingley, says: “This fee means that whereas before, for example, customers would have paid £75 to change the method of repayment on their mortgage account, £60 to extend or reduce the term of their mortgage and £200 to amend the account names, these fees are no more, as they are now included within the mortgage administration fee. This could potentially save borrowers hundreds of pounds over the life of the mortgage. The mortgage administration fee will be paid with the final mortgage payment.”
Other lenders are simply sticking with their current or original exit fee. Alliance & Leicester, which charges the most at £295, is keeping its exit fee. The bank has promised not to increase the fee during the term of the mortgage. However customers who took out an A&L 10 years ago were advised there would be a £110 exit fee, or £150 five years ago – these customers would be well advised to pursue a partial refund when they switch deals.
Meanwhile Barclays has agreed to honour the original cost that the borrower had signed up for. This is set at £275 at the moment but was just £95 five years ago.
The future
Critics agree that it is unlikely lenders will give up the revenue generated by exit fees without a fight. With the actual cost of administering the exit of a mortgage deal estimated to be substantially lower than the fee charged by the lender, the vast proportion of the exit fee is profit.
If the FSA introduced a blanket ban on exit fees, lenders would simply introduced new charges, such as hiking arrangement fees, which most have done already.
“If other rates and fees do increase or new charges are implemented, surely this is not in the interest of the consumer,” says Taylor. “A transparent fee, fixed from the date of application, is fairer and clearer for the consumer to see, and consistent across the market to allow comparison. Lenders using a multitude of ways to regain this money is not in the borrower’s interest.”
Some critics argue that exit fees are unfair by any definition and are poorly disguised penalties for leaving lenders, and even if redeeming a mortgage does incur some costs, how can lenders justify some charging £295 while others charge nothing at all? Surely the costs to exit a mortgage are relatively standard across the industry?
Katie Tucker of John Charcol, says: “There is little legal work involved for the lender to close a mortgage account, even the storage of deeds is now generally done electronically at the Land Registry. Were a lender to continue to charge an exit fee and to label it as an exit fee, they would have to prove that they were extremely inefficient at closing accounts. If exit fees are abolished altogether the costs would be recouped by other pricing.
“We will soon have a market where some lenders will have a justified exit fee, some won’t have a fee at all and the others will have a new fee altogether. The cost will have to be included in brokers’ calculations when selecting the best product. Brokers will also have to understand the terms and conditions of any new fees, and when they are payable.”
Melanie Bien of Savills Private Finance, says the FSA is right to investigate exit fees as they are not transparent and go against the principle of ‘Treating Customers Fairly’.
“In the past four years, exit fees have been hiked upwards and are, in many instances, far higher than the actual cost of closing a mortgage account,” she says. “It is astonishing that one lender can charge six times what another charges for essentially the same service.
“However, while fees should be fixed at the outset, the FSA should not interfere in what level they should be set at. We have one of the most competitive mortgage markets in the world and heavy handed interference from the regulator may jeopardise that. If exit fees are abolished, the cost of some other service will be bumped up; the consumer will end up paying for it in the end.”
Bien adds that as fees become more significant, it is vital for the borrower to work out the total cost of a mortgage – rate plus fees – when comparing one with another. “If you don’t know all the fees you can’t do this, which is why fluctuating exit fees are unfair and unhelpful. While not overly interfering in a competitive marketplace, the FSA needs to ensure that all fees are fixed at the start so that borrowers can budget accordingly.”
