Can I reduce the penalties when I redeem my mortgage?

Q I am an existing borrower with Abbey National with an outstanding mortgage of ?25,000. I have recently made an offer for another property, which has been accepted, so I am looking to borrow more and have requested a mortgage redemption figure. This has been quoted at ?28,000 as I'm currently tied into a 7.45% fixed rate until 2006.

I'd like to remain with Abbey but with another fixed rate (4.99% for 5 years) and have spoken to several members of staff requesting that the company waive at least ?1,500 of the penalties, but with no success. Half of the penalties consist of the cashback payment I received when I took the mortgage, and I can appreciate that I should repay that much when I redeem.

I want to borrow ?92,000 - far more than my existing mortgage - so I can't understand why Abbey won't help me instead of losing all my business. Is there anything that I can do to reduce the penalties?

RS

A You don't say when you originally took out your mortgage but given the extremely uncompetitive rate it is fixed at, I'm assuming it was some time ago. And I'm sure that all those years ago this seemed like a very good deal compared with the base rate of that time.

Unfortunately, your case highlights the potential pitfalls of signing up to long-term fixed mortgage rates: now that rates have plummeted, your mortgage is far more expensive than it would be if on a standard variable rate (SVR), plus you're still liable for redemption penalties in order to escape it.

Of course, some long-term fixed rates offer excellent deals - Coventry BS has just launched a 10-year fixed rate of 5.39%. Given that the average SVR is currently 5.95% and most analysts now feel rates are unlikely to fall much lower (though they're still unlikely to rise until next year), this mortgage not only offers an attractive rate but long-term repayment security to boot.

Your mortgage probably seemed just as good an offer at the time. But if you want to escape it, I'm afraid you will have to pay that ?3,000 early redemption charge (ERC).

Lenders are notoriously intransigent when it comes to waiving or even reducing ERCs. Their argument is that competition has driven mortgage rates so low (with discounts now starting at just 3.99%), they have to have some way to stop customers skipping between the best rates available and/or dumping their existing lender once their fixed or discount term ends, in order to be able to afford to offer the cheaper deals to begin with.

In your case, this isn't very fair - you're not chasing rates across the mortgage market and you're already paying way over what you would be paying on Abbey's standard tracker mortgage, for example. Unfortunately, the lender is unlikely to see it that way, especially given its current situation of having to refund interest to customers who were unfairly held on the higher of its two SVRs last year.