NatWest is to cap its early repayment charges on fixed rate mortgages, removing uncertainty for borrowers who wish to redeem their loans.
The move follows complaints from the Office of Fair Trading and the Consumer’s Association.
All new customers will have their redemption fee capped at 10% of the sum being repaid. Existing customers that took their mortgage out after October 1996 will have the fee capped at 5% where the fixed term is five years or less, or capped at 7% on terms over five years.
The fee is then calculated on the difference between the rate that the borrower is on and the bank’s fixed rate at point of redemption, multiplied by the amount repaid.
Prior to the cap there was no indication of the size of the charge at point of purchase. As a result, the more uncompetitive the loan became as interest rates dropped, the more expensive it was to redeem.
The Consumer’s Association noted one extreme example when interest rates were at their lowest, where a NatWest borrower was quoted a £41,000 charge on a £60,000 mortgage. NatWest insists redemption penalties are still fair despite recent criticism lodged against them.
David Sheridan, external affairs manager at the group, said: “We accept that the open-ended nature of our early repayment charges did create uncertainty. However, all we want to do is cover the costs that are incurred when a borrower elects to break their contract.”
He emphasised that the bank does not make a profit from the charge and, by putting the cap in place, it may well make a loss on some redemptions.
He added: “Redemption charges have to stay, otherwise there would be no competitive products on the market and a situation would arise where people that are happy with contracts will be subsidising those that break their contracts.”
Barclays is the only other lender to calculate its early redemption charges in the same way and at present has no intention to put a cap on charges.
A spokesperson for the bank said: “The charge reflects the cost to Barclays when borrowers’ make early redemptions. Therefore, we consider the charge to be fair.”
But some suggest that pressure on the bank to change its charges will increase.
Ray Boulger, technical manager at John Charcol, said: “If Barclays does not change its calculation methods then it may well be forced to by the OFT.”
He added that it was a logical argument that the charge was fair, but it remained problematic as borrowers did not understand the charge calculation.
Other methods of calculation were easier to understand, he said.
The Halifax, for example, uses a percentage calculation on its 10-year fix, which starts at 5% and falls by 0.5% pa over the length of the term.