Mortgage redemption charges on death

[gallerygirl]

Hi all, My partner died and he had a mortgage with Lloyds TSB, he held the mortgage for 10 years with 2 years left at the fixed tie in period and the mortgage has been paid off from his estate and the bank charge £1500 early redemption charge. Can they do this when the mortgage is only paid off because someone has died? I did not live in the house or mentioned on the mortgage.

Any help would be appreciated

[ROBSTER]

Re: Mortgage redemption charges on death

Sorry to hear about the circumstances of this claim.

Did the £1500 represent 100% of the early redemption penalty ? or was it a pro rata payment. I believe you may have a case as the liquidated loss too the bank was less (which in reality it would have been) then what they "trousered".

To take it to the extream if there was only one month left on the mortgage (instead of 2 years) could they justify £1500...no. It is just a blunt instument which needs to be pro rated down (at least) in my opinion.

[Emerald]

Re: Mortgage redemption charges on death

Sorry to hear about your partner.

Usually ERC's are waived on death.
Have you got a copy of the mortgage offer he signed?
Have you questioned this with the bank?

[Glenn UK]

Re: Mortgage redemption charges on death

As is often the case the first thing to do is to look at the documentation and determine exactly what has been charged and why?

If there are terms permitting the ERC even upon the death of the customer then the only recourse is to work out if its fair in law or legal.

ERCs are not my scene (not much actually is) but i do suggest that you have to get hold of the relevant documents.

i believe it must be done by the executors of his estate so if that is not you then you need to work with whoever is doing it i think.

HTH

Glenn

[argentarius]

Re: Mortgage redemption charges on death

There is nothing illegal about charging an ERC in the event of the death of a borrower, but both of the lenders I have worked for consider it unfair and bad practice and would not levy the charge if they knew that the payment was as a result of a death.

This would apply to capital payments, as well as redemptions (where, for example, one party to the mortgage died and there was a life assurance payout which was used to reduce the size of the mortgage outstanding).

The general issue of whether ERCs are fair or not is a wider one; the fact is that the standard "3% of balance" or "6 months interest" which are commonly charged (higher percentages or number of months for many sub-prime lenders) were excessive compared to the loss incurred whilst rates were high but they are now far less excessive.

It's easy enough to roughly estimate the loss.

If you have a mortgage paying 6% (say) fixed for another 2 years, and redeem now incurring a 3% ERC, then you have got off very lightly.

That's because 2 year swap rates are now around 2%. The lender might have bought their original swap at 5% - say - so they would have been making around 1% over that.

If you redeem early, they need to do a reverse swap to settle their position. That means that they will spend the next two years receiving 2% on a swap, and paying 5% on a swap. So they will make a loss of 3% per year, for 2 years.

So the fair value of the ERC would be 6%. But you only have to pay 3%.

I think that challenges to the fairness of ERCs are on a very sticky wicket whilst rates stay this low, and that people should consider their arguments carefully before going down this track.


Back to the original case, challenge the lender by reminding them that the redemption is only because of death and appeal to their better nature. But forget getting legal with them IMHO unless the terms of the contract specifically exclude death from the reasons for levying an ERC (and most simply say "if the mortgage is repaid").

[jax007]

Re: Mortgage redemption charges on death

Not wishing to hijack this thread but in relation to what Argent has said above ... am I right in thinking you are suggesting that if a fixed mortgage is nearing the end of its term and you redeem, then the ERC should be pro rata ... or at least to argue on that point?

Cheers
jax

[argentarius]

Re: Mortgage redemption charges on death

I don't think it's a valid argument where you have chosen to redeem.

The legal view as far as I understand it, is that the ERC is an optional fee to exit the mortgage during the ERC term. It's not a penalty, and hence it doesn't have to be pro rata or even related to costs.

I personally believe that any argument that an ERC should be related to costs incurred - where the borrower chooses to redeem of their own volition - is unlikely to succeed because it's not a penalty*.

I can see that there is (sort of) an argument that, if you do not choose to redeem but have your home repossessed, it is effectively a penalty as you have no choice but to incur it. This does lead to a potential unfair enrichment (probably not the right terminology, but you probably know what I mean) situation though - someone facing a huge ERC could in that case default, get repossessed, and end up paying less than someone who sells their house themselves and pays the ERC.

*Edit: After I posted this, I read the extract from MCOB Tools has posted: FSA Mortgage Charges Information - Legal Beagles

MCOB is - not uniquely on this aspect - contradictory and it's not surprising that lenders have interpreted it differently from how the man in the street might do - and the FSA have allowed them to do so.

The problematic quote is this:

A firm must ensure that any regulated mortgage contract that it enters into does not impose, and cannot be used to impose, an early repayment charge other than one that is:
(1) able to be expressed as a cash value; and
(2) a reasonable pre-estimate of the costs as a result of the customer repaying the amount due under the regulated mortgage contract before the contract has terminated

This is contradictory, precisely because an ERC which can be expressed as a cash value is unlikely to be one which is a reasonable pre-estimate.

That is why most lenders have simply said "your ERC is 3% of the balance repaid", because it's easy to express as a cash value. Far more likely to represent a reasonable pre-estimate is a term which incorporates both the number of months of the fixed rate term remaining, and the prevailing level of swap rates. But it's exactly that sort of - actually very fair - calculation which got NatWest into trouble because a fair ERC is not necessarily a small ERC.

If you have a £100k mortgage fixed for 25 years, at 6% (say) where the borrower got the money for 5%, and swap rates fall by just 1% to 4%, then a fair ERC one year into the deal would be something like 1% x 24 years x £100k = £24,000. That's the sort of level of ERC NatWest came up with, which was actually "fair" (defined as "matching the costs incurred"), but was a surprise to the customers involved.

This is why the government's attempts to encourage lenders to provide longer-term fixed rates have largely failed - the risks they place on the lenders are ridiculously high, OR the ERCs are ridiculously high, such that nobody will buy them. The few that have been offered generally involve the lender taking a flyer on the risk and basically getting stuffed if people redeem early.