It could be that the situation of redemption charges are no longer left to lenders and instead are tackled at European level, as it is currently in the EU mortgage directive document that lender charges should only reflect the cost to the lender of redeeming the mortgage.
Calculating this will be a little bit like going back in time when complicated formulas were used to work out the difference between the current charging rate and the cost of swap rates to the end of the term. It is very likely to have an upward effect on promotional rates or arrangement fees which are already under pressure from campaign groups and the national press.
Any move to decrease charges however, is likely to be seen as welcome by consumer groups; after all it was only just prior to the credit crunch that the average arrangement fee for a mortgage was about £300 whereas now the standard arrangement fee is £1,200 and redemption penalties can be significantly more expensive.
While the abolition of what can be seen as unreasonable charges and fees may appear to be great news, we must beware the consequences of such legislation should it become ensconced in our regulation.
At a time when interest rates are likely to start rising again in the next couple of years due to the growth in the economy, such legislation could well result in even higher interest rates across the board, even if by a marginal amount.
The answer surely has to be a happy medium. Some redemption fees are too high; charging only the costs incurred is a much fairer way of charging, but we must be prepared for slightly higher rates as a result – and in the interests of the consumer and of transparency let us hope that the costs to redeem remain clear and understandable.
David Copland is director of mortgage services at LSL