Borrowers cry foul on penalty

Natwest and Barclays have rejected calls to scrap their early mortgage repayment formula which has trapped home owners into mortgages with exit penalties of ?25,000 or more.

Most banks and building societies charge a flat-rate exit penalty on fixed-rate mortgages of either six months' interest or a percentage of the original advance, usually around 5 per cent.

But in October 1996, NatWest, quickly followed by Barclays, ditched its standard six-month penalty for a new method which increases the charge as interest rates fall. At the time NatWest told mortgage brokers that "the new method means that the customer will be charged more fairly for early repayment". But, two years later, home buyers are counting the cost.

One NatWest customer, who in 1997 fixed a ?175,000 mortgage for five years at 8.8 per cent - 3 per cent higher than many fixed-rate deals on offer today - is facing an early redemption penalty of nearly ?25,000, according to mortgage broker London & Country. The home owner, who wanted to remortgage to cut his monthly repayments, has now abandoned his attempt and is resigned to paying over the odds for years to come. Another NatWest customer who has turned to London & Country is facing an ?18,000 redemption bill.

The redemption bills worsen the longer the original fixed-rate period. Mortgage broker John Charcol has come across one NatWest customer with a 15-year fix who faces a towering ?43,500 redemption bill on a ?100,000 mortgage. NatWest was more active in the long-term fix market than Barclays, so has more customers with potentially enormous redemption bills if they want to quit their mortgage early.

Despite demanding redemption penalties that can be four or five times higher than other banks or building societies, both NatWest and Barclays insist that they are not making a profit from redemptions.

Barclays Mortgages marketing director Jim Chadwick says: "We are not making money out of it. We are exactly matching our book and not gaining at the expense of consumers. Other lenders are presumably making losses on redemptions." NatWest and Barclays are the only major lenders to use the interest-rate formula for calculating exit penalties.

The Office of Fair Trading is examining a complaint from one NatWest customer, but even if it rules that the NatWest method is unfair, existing customers will have little to cheer. An OFT spokeswoman says: "When we rule that a contract is unfairly weighted against consumers, we can ask them to change the contract for future customers, but we cannot order them to pay compensation to existing customers."

George Wise, the managing director of NatWest's ?16 billion mortgage business, says he is "very sympathetic" to the plight of mortgage customers facing huge redemption penalties, but insists that the calculation method is fair and legal. "We do clearly set out what the basis for early repayment is, we do say it is variable, and we do produce illustrations," he says.

He adds that NatWest is not making a profit out of the repayment penalties, suggesting that other lenders are taking large losses when customers redeem mortgages early.

Mr Wise said NatWest has no intention of cancelling the formula or setting a maximum ceiling for a redemption penalty. But he said that this week NatWest will open a helpline for mortgage customers caught in the redemption trap, which will assess each case individually.

However, mortgage brokers say that a redemption penalty based on unpredictable moves in interest rates is unfair on homebuyers. Ray Boulger, technical director at John Charcol, says: "The practicalities of what NatWest is doing are clearly horrendous. A much better approach is what Birmingham Midshires does. It is currently offering a 10-year fix at 5.39 per cent, which carries a 10-month penalty if the borrower redeems in the first year, nine monthss in the second, eight months in the third, and so on. In my opinion it is much fairer and people can understand it."

Another mortgage broker, Simon Tyler of Chase de Vere Mortgages, says his company has avoided recommending loans with interest-rate based penalties. He says: "We have never been comfortable with it. It's very difficult to give advice to a customer when you can't tell them exactly what the redemption penalty will be - it could be nothing, if interest rates rise, or it could be huge, if interest rates fall."

Halifax, the UK's biggest mortgage bank, changed its redemption penalties to a sliding-scale system in July 1996. On fixed-rate mortgages taken out before that date, it charges a percentage fee but a spokeswoman says that 6 per cent of the original mortgage is the maximum anyone has had to pay. In contrast, a NatWest customer with an 8.8 per cent 10-year fix taken out three years ago is facing an early repayment penalty worth 23 per cent of the original mortgage.

The furore over NatWest and Barclays' redemption penalties has reignited a wider debate over how lenders charge customers who want to switch out of their mortgages. In September last year the Office of Fair Trading warned lenders about potentially unfair terms in mortgage deals, particularly over "lock-ins" on mortgages where the lender can vary the interest rates applied.

The issue of mortgage regulation is also under review. Mortgages, unlike investments and pensions, do not come under the Financial Services Act. The Council of Mortgage Lenders (chairman: NatWest's Mr Wise) has so far resisted statutory regulation, but at their annual gathering last week they were warned by Treasury economic secretary Patricia Hewitt that she is aware of evidence that some mortgage lenders are giving people misleading or inaccurate advice.

Sums that add up to a nightmare
By Patrick Collinson
A ?100,000 mortgage with a ?17,000-plus redemption penalty? That's the financial nightmare for customers who took out fixed rate loans at Barclays and NatWest less than a year and a half ago.

NatWest and Barclays are the only major lenders using an interest-rate formula to calculate the redemption penalty on a fixed-rate loan. Others charge either a percentage of the original loan or six months' interest payments.

The NatWest and Barclays formula multiplies the remaining term of the fixed period by the difference between the original fixed rate and current interest rates. The bigger the difference, the bigger the penalty.

For example, both NatWest and Barclays were offering a 10-year fix in November 1997 at 7.99 per cent. A borrower who took a ?100,000 mortgage then, but is now tempted by fixed rate offers of 5.5-6 per cent, faces a redemption penalty of ?17,476.90 on the Barclays loan and ?17,079.48 on the NatWest loan, triple the Abbey National level.

Abbey was also offering a 7.99 per cent 10-year fix in November 1997, but it says it would now charge a nine-month interest penalty - ?5,762.

With the more common five-year fixes, Barclays and NatWest penalties are again considerably higher. Barclays' five-year 7.79 per cent fix from November 1997 currently carries a ?7,225.13 exit charge on a ?100,000 loan. NatWest was offering a 6.99 per cent fix in November 1997, and even exiting from that reasonably low rate would cost ?4,794.20.

In contrast, Halifax would charge a fixed 4 per cent redemption fee (?4,000 in this case - almost half the Barclays' penalty).

The Halifax system works on a sliding scale where redemption in the first year of a five-year fix costs 5 per cent of the loan, 4 per cent in the second year and so down to 1 per cent in the final year. The interest rate at the time is therefore irrelevant.