Mortgages. Exit Fees To Be Capped.

Understanding Mortgage Exit Fees and True Costs

In recent years, many borrowers have been hit hard by soaring exit fees when redeeming their mortgages. These fees have sometimes increased by up to 450%, with lenders raising costs without prior notice to borrowers. The Financial Services Authority (FSA) has recognized the issue and is working on measures to address these increasing fees.

Current Exit Fees Trends

Lenders have used the flexibility to hike exit fees, which can significantly impact those who frequently switch mortgages to secure better interest rates. For instance:

• Woolwich raised its exit fee from £95 to £275.

• Cheltenham & Gloucester increased its fee from £50 to £225.

These fees are often seen as penalties for borrowers who seek better rates, leading to substantial profits for lenders.

FSA’s Intervention

The FSA is aiming to curb these practices by enforcing greater transparency. Their goal is to ensure that:

• Exit fees are fully disclosed at the outset of the mortgage agreement.

• The disclosed exit fee remains fixed for the duration of the mortgage.

The FSA is negotiating with lenders to formalize these changes, with an expected outcome by June.

Evaluating Mortgage Deals

When comparing mortgage deals, borrowers should factor in all associated costs. Here’s a comparison of two example mortgage offers:

• Northern Rock:

  • Interest Rate: 4.19%

  • Arrangement Fee: 1.5% of the loan amount

  • Exit Fee: £250

• Halifax:

  • Interest Rate: 4.39%

  • Arrangement Fee: £499

  • Exit Fee: £175

  • Additional Benefits: Free valuation and free conveyancing (value: approx. £750)

Cost Analysis for a £100,000 Mortgage Over 2 Years:

• Northern Rock: £14,671

• Halifax: £13,864 (including £750 savings from free valuation and legal services)

Despite the higher headline interest rate, the Halifax deal is cheaper when all factors are considered.

Impact of Interest Calculation Methods

Another crucial factor is how interest is calculated:

• Daily Basis: Interest is computed daily on the outstanding balance.

• Monthly Basis: Interest is calculated monthly on the outstanding balance.

• Annually: Interest is calculated annually, leading to higher costs over time due to interest charged on previously repaid amounts.

On an equal basis, annually calculated interest will generally be more expensive than daily or monthly calculations.

Final Advice

To find the best mortgage deal, always read the fine print and understand all charges:

• Application Fees

• Arrangement Fees

• Reservation Fees

• Booking Fees

• Completion Fees

• Early Redemption Fees

Be vigilant about all fees and conditions, as lenders use various terms to describe them. This thorough approach ensures you fully understand the true cost of your mortgage and avoid unexpected charges.