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UK mortgage lenders set to refund millions in "unfair" mortgage fees

Following a ruling recently by the Financial Services Authority (FSA), millions of Brits look set to be reimbursed hundreds of millions of pounds in "unfair" mortgage fees.

At the heart of the latest issue to be brought before the FSA involving UK financial institutions is whether or not the amount UK mortgage lenders are charging as exit fees in unfair. Over the last ten years, as an average, the amount that UK mortgage lenders charge their customers when a mortgage has been redeemed (the so-called, “exit fee”) has risen exponentially, from a previous average mortgage exit fee of £80 a decade ago to today’s average fee of £200.

According to Clive Briault, managing director of the FSA, UK mortgage lenders had previously justified this steep increase in the exit fee as a means of deterring customers from switching to better mortgage deals. A decade ago, with fewer mortgage deals on offer, and less opportunity to do price comparisons on the different mortgage products on offer, this was not considered such a problem.

Even though the FSA's ruling is likely to have an impact of between £200 and £300 million on the industry, the decision by the FSA will still not have any immediate impact.

To start with, UK mortgage lenders have refused to make automatic compensations, even in cases where the FSA clearly sees the exit fee as being unfair. Rather, it will be up to the borrower to contact their home mortgage lender to make a request that they be compensated. Second, the compensation will likely only be paid to those borrowers who were charged more in exit fees than the amount set out in their original mortgage offer, or the among being charged on the day of their mortgage offer if no such amount is expressly stated in their offer letter.

As such, under the present compensation scheme, it would appear that to be entitled to compensation you need to have paid more in exit fees than the amount set in your offer letter, regardless of whether or not the amount of the exit fee set out in your offer letter is itself an unfair fee.

Commenting on these latest developments in the UK mortgage sector, David Hollingworth, of L&C Mortgages, said that: "It is important that borrowers take action if they have been unfairly charged because no refund will happen automatically."

Loiuse Cummings, of, added that: "The current level of fees seems extortionate. I believe all exit fees should be reduced to reflect the cost of the administration work involved."

Many insiders put the cost of the administration work for redeemed mortgages at approximately £65.

Nevertheless, Michael Coogan, director general of the Council of Mortgage Lenders, said that "transparency" given to the issue of mortgage exit fees could only help ensure that customers became aware of what they were required to pay as early as possible, i.e., on the offer letter date.

Richard Smith
1st February 2007


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