This section of the website describes how we approach cases involving early repayment charges - where a consumer wants to repay their mortgage early. This section only covers residential mortgage contracts.
An early repayment charge is most likely to be included as a term of a mortgage contract where the customer has a product that includes a fixed, capped or discounted interest rate.
Lenders finance mortgages in different ways. For example, a lender may borrow large slices of fixed-rate money to lend on to their customers. If a consumer repays early, this leaves the lender with a fixed-rate sum still to support which may involve some cost.
A lender might offer discounted rates on the basis that it will be able to recoup the discount by keeping the consumer on its standard rate for a period, after the discount has finished. But if a consumer leaves early, the lender may incur a loss.
In considering complaints about early repayment charges, we look to establish whether the charge has been brought fairly to the consumer's attention. There are a number of ways a lender could do this.
There are other considerations as well - such as how the agreement was entered into, and what the consumer was told at this time.
This section of the website gives more detailed information about our approach when looking at early repayment charges in residential mortgage contracts.
When considering complaints involving early repayment charges, we take into account the legal and regulatory standards that apply to them.
When a consumer enters into a contract, the general starting point is that they are bound to the terms and conditions - even if they have not read or understood them.
However, an early repayment charge is considered to be an onerous and/or unusual contract term.
In applying the law here, an early repayment charge does not form part of the contract unless it was brought fairly to the attention of the consumer, before they committed to the contract.
So if the early repayment charge was not brought to the consumer's attention in this way, it may not be binding.
As part of the "disclosure" process, the "MCOB rules" (the part of the FCA's Handbook that covers mortgages) say that at the offer stage:
These are issues which will be clear from the evidence we have - provided by the consumer, the lender, or both.
The FCA's "MCOB rules" set out the requirements for disclosure and the basis for early repayment charges.
An early repayment charge must be specified as such, and:
The "MCOB rules" also say that the illustration and the offer (given to the consumer) must include, in relation to an early repayment charge:
If the charge is to be calculated in accordance with a formula set out in the mortgage agreement, it should represent a reasonable "pre-estimate" of the cost to the lender of the loan being repaid early. This is often a complex calculation.
However, a lender is allowed to calculate and price this "pre-estimate" on a product or portfolio basis. And so we look at the early repayment charge in the context of the product as a whole - and not by making individual calculations for consumers about the specific agreement they have.
When assessing early repayment charges, we take into account all the circumstances of the case, including:
What this means is that an early repayment charge must be brought fairly to the attention of the consumer to be binding. This is particularly important if the early repayment charge extends beyond the term of a special deal.
This does not mean that the charge has to be specifically pointed out to the consumer by the mortgage adviser. It can be fairly brought to the consumer's attention either by being clear and reasonably prominent in the mortgage agreement (on the front of the documents, for example) - or by being highlighted separately.
Where older documents have been prepared in a non-regulated format, we would expect to see the early repayment charge set out clearly in the loan/offer papers.
It is a regulatory requirement for lenders to keep documentation. But where this is not possible, the lender may only be able to supply an example of the type of agreement it is relying on - saying that it would have been sent to the consumer. As in all cases, we will consider all relevant individual circumstances to assess what a fair and reasonable outcome should be.
Some lenders waive the early repayment charge when the mortgage is repaid following the property being taken into possession - but this not a specific requirement of the "MCOB rules".
In considering possession issues, we look at all aspects of each case in line with what we consider is fair and reasonable - and taking into account issues relating to financial hardship.
There are other considerations we take into account when looking at early repayment charges. Here are some of the most common issues - and misconceptions - that we see:
Did the lender mislead the consumer?
In bringing the early repayment charge fairly to the attention of the consumer, it is not necessary for the mortgage adviser or broker to do so orally.
We assess the early repayment charge to establish if the charge is clearly provided for in the terms of the mortgage agreement.
If the consumer has been misled by the lender about the nature or effect of the early repayment charge term - and the consumer signed the agreement relying on what the lender has told them - then we may consider that the consumer is not liable to pay the charge.
How fair is an early repayment charge?
Under the relevant rules, the lender must ensure that the early repayment charge is expressed in plain and intelligible language. If there is any doubt about what the term means, the ambiguity has to be interpreted in a way that is favourable to the consumer. Ultimately, we will consider the facts and individual circumstances to assess what a fair outcome should be.
We may need to assess the fairness of a term in a mortgage contract that relates to an early repayment charge - taking into account (among other things) all the circumstances when the agreement was entered into; the bargaining position of the parties; whether the consumer was persuaded to agree to the charge; and the extent to which the lender has dealt fairly with the consumer.
The lender's actual loss if a mortgage is repaid early is also a consideration. An early repayment charge may be unfair if it is more than the actual loss to the lender (except if it was a genuine "pre-estimate" of loss when the agreement was entered into).
If an early repayment charge is unfair, the consumer is not bound by it - even if they knew about it. The relevant rules do not allow a "reasonable" charge to be substituted.
Doesn't a mortgage early repayment charge constitute a penalty?
A "penalty" - a legal term - only applies to a payment that is to be made by someone who is in breach of the mortgage contract.
If an agreement includes an early repayment provision, then it is clear that early repayment of that agreement is not a breach of contract - as the consumer is entitled to redeem the mortgage early.
However, an early repayment charge might be argued to constitute a penalty, if it exceeds what was a genuine "pre-estimate" of loss at the time the agreement was entered into. In this case, the charge will be unenforceable even if the consumer knew about it before they signed the agreement.
If we decide that an early repayment charge should not have been applied, we may tell the lender to:
We may also say that the lender should pay compensation for any significant distress or inconvenience that the consumer might have suffered. We assess these payments individually, based on the circumstances of each case.
We sometimes see cases where the consumer is unable to pay the early repayment charge - meaning they are tied into the agreement. We assess these cases on their own individual facts and circumstances, to come to a fair and reasonable outcome.
Occasionally, a consumer will claim a much larger financial loss, where they say they were unable to pay the early repayment charge needed to redeem a mortgage. The claim might involve the loss of profit on a property sale or the loss of a business opportunity. We will take into account the evidence provided to support claims like these.
ombudsman news features
ombudsman news case studies
contact our information helpline on 020 7964 1400
This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.