ERC on mortgages

[scoobydoo]

Re: ERC on mortgages

1.20 The bank also gave a written undertaking that it would not seek an early repayment charge (ERC)
at all in the event of death or repossession. Cases of hardship would be dealt with sympathetically
and on a case by case basis. In addition, the bank agreed that maximum redemption charges on all
new loan agreements would be clearly expressed in cash terms
------------------------------- merged -------------------------------
And by the way I have seen cases OTR where the possession was within a month or so of the end of the tie in period.

I am still saying that the KFI indicate in some contracts that the ERC is in the control\of the borrower. In other words you would quite rightly imagine that the only time it would be repayable would be if you decided to move or found a better mortgage deal and chose to repay and re-mortgage.

Please understand I am not arguing that the charge should be waived I am just suprised that it is not clearer in the KFI. As I am sure you are aware I dealt with possessions many years ago in another climate of lending all together and I have seen the vast array of different circumstances that can result in possession. However at the moment I am really shocked at SOME lenders who seem to be determined to kick people down when they are at their lowest point . Especially the charges that are being levied on arrears and possession and SOME lenders think they are above the current protocol recommendations. Also common sense would indicate that you do not keep charging automatic monthly fees when a borrower is trying to get themselves out of a very difficult and stressful situation.

[argentarius]

I can't ever disagree that clarity is a good thing!

It is not helped by the mandatory wording of KFIs. The ERC information comes in a section "What happens if you do not want this mortgage any more", which itself doesn't clearly cover repossessions. But that's the only place lenders can put the ERC information.

They can word it pretty much how they like though - the wording is not mandated. For example

"Early repayment charges are payable on this mortgage for 36 months:

Initial 36 months ... 3% of amount repaid ... £x.x to pay"

I'm not sure how much clearer than that it can, or should, be. I am sure there are worse examples as you say, which talk about what happens if the borrower chooses to repay during the ERC period.

I am somewhat on the fence about what you call "automatic" monthly fees. Arrears cost lenders money in several ways. Obviously it costs a small amount to send an automated letter, and a larger amount to actually phone and discuss the arrears with a borrower. But on top of that, lenders have to allocate significantly more capital against mortgages in arrears. The idea that it costs a lender 50p a month - the cost of an automated letter - and they then charge £25 or £50 or whatever is false.

If a mortgage goes over 90 days in arrears, it needs almost 3 times as much capital. If it ALSO goes over 100% of the property's value (not unusual in times of falling house prices) it needs a further 50% increase in capital allocation.

If the lender makes (say) 1% interest margin on their mortgages, then a £100k mortgage going over 90 days' arrears stops them lending a further £186k on which they might make £1,860 a year in interest margin. So, the arrears case is actually costing them around £155 a month. And even more if it goes over 100% LTV.

Whilst it might appear that it's common sense not to "keep charging automatic monthly fees", not doing so means that those who are not in arrears are subsidising those who are - or that lenders are genuinely losing money.

[scoobydoo]

Re: ERC on mortgages

I can understand what you are saying as I dealt with mortgage arrears for quite a while. However at that time we did not charge until the possession stage. And as we know at the moment the MAJORITY of borrowers do not fall into arrears deliberately. In those days the costs of dealing with arrears must have been factored into the overheads of the business. I would say that most cases under say three or four months in arrears took a five minute phone call each month - writing a report and a diary note to follow up.(it was a long time ago!)

In my mortgage the ERC is in the KFI - but just says the charge will apply if the borrower repays early and very clearly states the amount.

I still think that the Gov should introduce a compulsory PPI for all borrowers with fair terms and then just distribute the policies to insurance companies willing to participate.

I know there are arguments against this but I still think it should be considered think of the heartache it would have saved now.

And that really grates for me to say that as I do hate a nanny state.

[Emerald]

Re: ERC on mortgages

I still think that the Gov should introduce a compulsory PPI for all borrowers with fair terms and then just distribute the policies to insurance companies willing to participate.

Why? Not everyone will need an insurance policy, many people have other resources to pay off mortgages in times of unemployment and also people get paid for varying lengths when sick. Making it compulsory is just another expense that homeowners couldn't afford.

[scoobydoo]

Re: ERC on mortgages

because it is often the most vunerable who dont have that insurance . If many people have alternative cover why are there so many possessions at the moment?It just seems to me that it is the largest commitment that we make in our lives and to be able to lose it all in the blink of an eye seems a crime to me. Personally I pay a large amount each month for PPI - but now wonder why I bother as the government is now going to step in and pay the interest on many peoples mortgage using tax payers money. If there had been a more affordable more transparent scheme in place then that would not have been necesssary. If a person had alternative cover they could reduce it. If they get paid sick leave at work - the cover would be a bonus.

I am not talking about the complicated expensive schemes in place now but one in PIL (if thats possible) with standard terms and variations for self-employed.

We have accepted we should insure our cars and our homes - why not the biggest debt we ever take on?

[Emerald]

Re: ERC on mortgages

because it is often the most vunerable who dont have that insurance . If many people have alternative cover why are there so many possessions at the moment?

There are far more who are NOT being repossesed than are.

It just seems to me that it is the largest commitment that we make in our lives and to be able to lose it all in the blink of an eye seems a crime to me.

It doesn't happen just in the blink of an eye, people get into difficulty over a period of time. A lot of repos are through relationship breakdown. Some are because people have overstretched themselves when taking the mortgage on in the first place. Some are illness, job losses etc.

Personally I pay a large amount each month for PPI - but now wonder why I bother as the government is now going to step in and pay the interest on many peoples mortgage using tax payers money.

They always have, all they have done is reduce the amount of time it takes for this to kick in. In genuine cases I have no problem with my taxes being used in this manner. If someone is eligible to claim any benefit from a policy is taken from the benefit.


If there had been a more affordable more transparent scheme in place then that would not have been necesssary. If a person had alternative cover they could reduce it.

How could it be reduced if as you are suggesting it is compulsory? A huge % of reclaimed PPI is on the basis that it was missold as a condition of the loan.

If they get paid sick leave at work - the cover would be a bonus.

No it wouldn't - most PPI doesn't kick in until sick pay stops, in addition those in jobs where sick pay is paid for a long period, traditionally earn less to reflect this perk.
For example working for a local authority I am entitled to 6 months on full pay and 6 months on half pay. A similar job in the private sector pays around £2k less but only offers 2 months full and 2 months half pay. As i have been off since mid December and won' t return until mid March, this benefit is worth a fair bit to me at seemingly no cost, but I have paid for it by staying in the public sector.

I am not talking about the complicated expensive schemes in place now but one in PIL (if thats possible) with standard terms and variations for self-employed.

We have accepted we should insure our cars and our homes - why not the biggest debt we ever take on?

Cars are insured for legal reasons to 3rd parties. Home insurance is only compulsory if you have a mortgage.
I don't have PPI, but I overpay a fair bit on my mortgage each month - I'd much rather do that than spend it on insurance.
All compulsory PPI would do is put up the cost of mortgages, I would bitterly resent being forced to pay a % of my income to a compulsory scheme, when I am quite capable of making my own financial choices. In addition no scheme would pay out forever, so in effect it would only be delaying the inevitable.
There are schemes in place now to help people in difficulty in the first 2 years to get back on their feet.

[scoobydoo]

Re: ERC on mortgages

I agree you have some fair points - however I think we just have to agree to disagree on this one.

If it was not for the new protocol there would be people being evicted for three month arrears - 12 weeks of not paying . hmm how things change

[Emerald]

Re: ERC on mortgages

I agree you have some fair points - however I think we just have to agree to disagree on this one.

Agreed.....
If it was not for the new protocol there would be people being evicted for three month arrears - 12 weeks of not paying . hmm how things change

.......But if they had a reasonable repayment plan in place then the court would be sympathetic, its just a sad fact that some people will get into a situation where they cannot keep their property's, and sadly in this current climate the shortfalls are likely to be huge.

[scoobydoo]

Re: ERC on mortgages

I agree the courts in a lot of cases are being more sympathetic but I am only seeing the cases OTR where they are getting excellent help with defence documents. From what I hear the Subprime lenders are still giving those that are not properly prepared or have their defences down a very hard time.

Also one comment about PPI - it has become a nasty product because of greed by the insurance companies /commissions and because of mis-selling.If the profit margin was kept low because it was a product that the Gov felt was a necessity and also it was a more simpler product with standard terms with a cost structure that all insurance companies adhered to then I feel the cost could be brought down.

Back to the ERC I am still in two minds but have failed to get any answers or indications about whther they should be applied when the mortgage comapnies instigate possession.
But the FSA did say that if borroweres felt it was an UFTC not properly explained at the time of the mortgage then borrowers could complain through the normal channels. For te cost of a few letters that is what I would advise people to do.

[argentarius]

Re: ERC on mortgages

I don't personally believe there is any great chance at all of claiming that an ERC is an UFTC. And it's the responsibility of the solicitor to explain the contract terms to the borrower, not the lender's - especially if sold via an intermediary.

Since mortgage regulation, and standard format KFIs, ERCs have been crystal clear IMHO (apart from your earlier comments about them not always being obvious whether or not they apply in the case of repos).

At my work we have had a few FOS cases upheld on ERCs. They weren't related to repos, though, but to the more frequent circumstance where the borrower wanted to port the mortgage, but couldn't because:

(1) in one case, they were moving to Scotland and we don't lend there; or
(2) in the other case, he wanted to double his borrowing to about 7 x income and was surprised we wouldn't let him.

In both cases the FOS held that the ERC was completely binding on the borrower. I think one was pre-regulation, and one was post.

[scoobydoo]

Re: ERC on mortgages

Here is the basis of one case that did succeed through the FOS on possession.


Jansus, the person did go through the FOS, and it was deemed that as there was only three months before the ERC should have expired the claiming of this was 'not in the defendants interest' and put the lender in a far more stronger position than they should have been (in this case only three payments had been missed). It was a couple of years ago now but I can see if I can get you the reference from them for this... cant make any promises though coz they've lost a lot of the paperwork in between.

[spinaltap]

Re: ERC on mortgages

The OFT in its Guidance on Unfair Contract Terms issued in August 2008 stated that a financial penalty(such as an ERC) should not be disguised as a 'core term' of the contract. Mortgage companies argue that it is not a penalty but the cost of exercising an option. What option do you have when you are being reposessed?

It also states that such penalties must be fully justified and that a wide ranging penalty which is payable by all borrowers may be unfair if it results in some customers paying too much.. i.e 6% in the first three years etc.

The FSA in their review in 2007 said that ERC's must not result in a borrower being asked to pay a disproportionate cost for exiting a mortgage early.

Has anyone had their ERC fully explained and justified?

Has anyone found that the FOS take the above guidance into account?

I hit a blank wall in my dealings with them.

[scoobydoo]

Re: ERC on mortgages

So are you saying you had an offcial case with FOS about ERC
? On what basis and what was the reply?

[fuzzybrain]

Re: ERC on mortgages

I manged to get my ERC back from my old mortgage company - i think I was lucky, but they did pay up without me having to go to court. This was in 2007

We moved house and had to remortgaged with another lender as the old mortgage company wouldn't allow us to port the mortgage over to the new property. we had to complete earlier than expected and we only had 41 days before the ERC no longer applied. Our solicitor at the time told us tough - just accept it, so we did. A year later i wrote to them and after eceral phone calls and letters they refunded 75% of the ERC (which is what i asked for)

I was supposed to sign an agreement that i would discuss the settlement publically, but silly me forgot to sign it and post it back - opps!!!

I'm happy to post up a copy of the letter i used if that helps anyone??

[spinaltap]

Re: ERC on mortgages

In reply to scoobydoo's question : my complaint was lodged with the FOS because the mortgage company would not provide a detailed justification of the ERC and as we had been under threat of repossession(it was avoided as we managed to sell) we had no choice but to end the mortgage and pay the penalty(over £18000)

The FOS barely investigated and accepted the mortgage co. response that the ERC was in the contract so it was tough luck on us. They paid no attention to the OFT guidelines or FSA comments.