OFT forces climbdown on mortgage lock-ins

The office of fair trading yesterday forced NatWest to climb down on sky-high mortgage lock-in penalties, which have landed customers with bills of £40,000 or more if they want to switch loans.

The move by the OFT, which described NatWest's mortgage penalty calculation basis as "incomprehensible", heaped further embarrassment on the bank at a time when it is fighting off the £22bn hostile bid by Bank of Scotland.

The OFT victory, which has prompted NatWest to offer compensation to the mortgage customers affected, came just hours before today's mortgage summit called by the department of trade and industry.

The summit, introduced by Stephen Byers, the secretary of state for trade and industry, will scrutinise the need for further consumer protection and regulation of mortgages. In its ruling on NatWest, the OFT - under its powers of "unfair contract terms" - criticised the bank's lack of transparency in the contracts and said it meant that borrowers did not realise that they could face "ruinously high charges".

In coming weeks the OFT will publish research on the way such redemption charges, of major concern to ministers, could be treated more fairly.

In one of the 90 cases investigated by the OFT a homeowner with a £60,000 mortgage was faced with a redemption charge of £40,000.

Worst hit were the thousands of borrowers who took out 10 or 20-year fixed mortgages with NatWest between October 1996 and October 1997 at rates of around 8%.

They were trapped into a complex formula that pushed up the penalty charge as interest rates fell. The formula is used only by NatWest and Barclays, but NatWest customers were hit harder because the company specialised in longer-term fixes. The OFT said customers could have no idea of the potential bill they faced, as the example given in contracts showed a penalty of just £300.

George Wise, the managing director of NatWest Mortgage Services and chairman of the Council of Mortgage Lenders, said: "We don't believe our formula was incomprehensible, but we accept it was capable of improvement." NatWest, the seventh largest lender in Britain with £16.5bn in loans to 300,000 borrowers, has agreed to cap the redemption penalty on its fixed rates at 5% of the capital for loans with less than five years to run - that is, a £5,000 bill on a £100,000 mortgage - and 7% on longer loans.

It also faces a multimillion-pound bill to compensate customers who have transferred their loans despite penalties.