Customers snared by 'hidden' mortgage charges

Mortgage lenders are trapping unwary customers into paying more than they need to for their home loans, a consumer group said.

Consumer magazine Which? said seven of the UK's top 20 lenders charged interest on an annual basis on at least some of their mortgages, while one bank charged annual interest on all its products. Charging interest annually, rather than calculating it daily or monthly, means that borrowers end up paying interest on money they no longer owe until the lender recalculates their debt at the end of the year.

On a ?100,000, 25-year repayment mortgage with interest charged at 5.8%, the group said that a borrower would pay nearly ?90 a year extra if interest was calculated annually instead of on a daily basis.

Which? also found that six of the major lenders charged interest until the end of the month for people who paid off their mortgage early, meaning that someone who repaid their loan on the third of the month would still have to pay interest until the end of it.

The group went on to criticise lenders for charging borrowers a mortgage indemnity guarantee (MIG) if they borrowed a high proportion of the value of their property. Thirteen of the 20 biggest banks and building societies were found to charge MIGs for people borrowing more than 90% of the value of their property, costing between ?1,450 and ?1,790 for a 95% mortgage on a property worth ?100,000. The cost is usually added on to the amount borrowed.

Lenders use money from the MIG to buy an insurance policy to protect them if the house is repossessed and they are owed more by the borrower than they can get from selling the property. Although it is the borrower who pays the MIG, the group pointed out, it is actually the lender who was protected.

Which? also found that a number of major lenders charged people fees (such as an administration charge or a fee for releasing the property's deeds, ranging in cost from ?50 to ?195) when they paid off their mortgage. Others were slow to pass on reductions in interest rates or did not pass on the full cut.

"There's no excuse for the mortgage lenders still to be trapping people in these underhand ways," said Malcolm Coles, editor of Which?. "When we contacted those who charge interest until the end of the month, none of them offered much justification. This just isn't good enough."