Pay more to leave your lender

Some mortgage companies are doubling charges for customers who leave.

There is no doubt that it is expensive to buy a house and take out a mortgage. But the cost of paying off a mortgage is also on the rise. During the past few months, several mortgage lenders made substantial increases to the fees they charge when a homeowner pays off their loan, either at the end of the term or because they are remortgaging.

There is no doubt that it is expensive to buy a house and take out a mortgage. But the cost of paying off a mortgage is also on the rise. During the past few months, several mortgage lenders made substantial increases to the fees they charge when a homeowner pays off their loan, either at the end of the term or because they are remortgaging.

Exit fees - also known as deeds fees or sealing fees - are due when a homeowner closes a mortgage account with a lender. The fees are meant to cover the lender's administration costs connected with closing the account. But a growing number of mortgage brokers suspect that the fees are being used to claw back profits from borrowers who are moving to another lender.

NatWest recently increased its sealing fee from £100 to £225; Abbey has also increased its charge to £225. Nationwide, a building society that shied away from such fees, has introduced a charge of £90. Northern Rock charges £250, and Alliance & Leicester £295.

The financial research service Moneyfacts says that 53 lenders have increased exit charges during the past year. As many as 23 lenders have more than doubled the charges, Moneyfacts says.

Borrowers have no choice but to pay the higher fees. Home buyers taking out a new loan can shop around and compare charges, such as mortgage arrangement or booking fees, valuation costs and even early redemption charges for leaving a special deal - such as a fixed rate - ahead of time.

Once a buyer has signed up with a borrower, there is no way of avoiding the exit fee. In most cases, the charge is levied even if they pay off their mortgage in full after 25 years. The exception is where a lender calls the charge a redemption fee. In these cases, the fee should only be charged to buyers who pay off the loan early. "Lenders are getting wise to the fact that customers are leaving, and are throwing down as many obstacles as they can to make it unattractive for homeowners to shop around," says Ian Giles, a director at brokers Purely Mortgages.

Mr Giles says that although lenders argue that the charges are still quite small, they do have an effect. "Sometimes a client who is thinking about remortgaging looks at the fees and decides to leave it, even if the savings over a couple of years could be several thousand pounds," he says.

A homeowner who is already stretching their finances to pay a mortgage might not have the cash to pay the extra charges; unlike upfront valuation and legal fees, there is no help available from the new lender to cover exit charges.

Brokers are also worried about the level of exit fee rises. The small print of mortgage contracts states that exit fees are variable, but they are not linked by any fixed formula to the size of the loan and there is no upper limit on what lenders can charge.

Nor is there much consistency across the market. The larger mortgage lenders have, so far, appeared keenest to increase exit fees. Many of the smaller, mutual building societies still charge as little as £40 in deeds fees. It is unlikely that one lender's costs are five times higher than another's, suggesting either that lenders hope to recover the costs partially out of interest charges, or that the higher fees are, in fact, a form of penalty.

The Financial Services Authority (FSA), the industry regulator, is not able to govern fees charged by mortgage lenders. But it does require that lenders disclose the full cost of all fees and has a guiding principle that lenders must treat customers fairly. There is a further rule covering excessive charges.

In the next few months, the FSA is expected to issue further guidance to lenders covering increases in charges during the term of a contract. This might well prompt other lenders to follow the lead of Northern Rock. The lender does have one of the more expensive exit charges, at £250, but the bank guarantees that the fee will not rise during the lifetime of a mortgage.