Are Mortgage Redemption Charges Unlawful?

Bank charges are unlawful, as are mortgage exit administration fees. Now we turn our attention to mortgage early-redemption charges.

That bank charges are unlawful is indisputable in my mind. The same goes for excessive mortgage exit administration fees. However, mortgage early redemption charges are another matter.

Typically, you pay an early redemption charge (ERC) when you switch mortgages within an introductory deal, e.g. within two years if you have a two-year fixed-rate mortgage. Sometimes you have extended early repayment charges, which means you may be charged beyond the deal period.

These charges are based on a percentage of your mortgage, e.g. you might be charged 2% of your outstanding £100,000 mortgage, which is £2,000.

Are these charges unlawful?

There are lots of arguments on both sides. Most claimants have based their arguments on similar lines to bank charges. They say that the redemption charge is a charge for breach of contract, because by switching mortgages you are terminating your contract before the agreed period. Thus, they argue, any charge that is greater than the mortgage company's administrative costs is a penalty, and penalty charges are illegal.

So far I've read about a dozen cases that have been won, all for less than £5,000 and all of them settled prior to a court hearing. £5,000 is a significant figure, because claims under it usually cost you no more than about £150 if you lose. If you lose a claim over £5,000 you will almost certainly pay the other side's legal costs. Mortgage companies usually have large teams of expensive lawyers, so costs could easily be another £5,000 or more.

However, recently several cases have been lost. Where cases have been lost, it seems that the question of whether these charges are penalties doesn't even come up, because the claim is rejected on the grounds that closing your mortgage early is not a breach of contract. It follows, therefore, that it can't be a penalty for breach of contract.

So there is a lot of uncertainty. The only things we know for sure are that these claims are no way near as straightforward as penalty bank charges and that most claimants are out of their depth. With claims over £5,000 in particular, the risks, at this stage, are not worth the rewards.

So I will not yet be writing a guide to claiming these charges. I will need more information and more certainty (one way or the other), which I shall continue to look for.

If you can't wait then you can always do your own research. You could start by asking users on our Reclaim Unfair Mortgage Fees discussion board. I suggest you also visit the excellent Consumer Action Group website to see what you can learn from their users too.

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