Co-Op Bank early redemption penalty

[artoo]

Hello!

 

I am selling a house and therefore having to redeem my mortgage early.

It's a standard 2 year discount rate but as I am selling after 18 months there is a huge 3% penalty (£3.5k).

 

I was planning on writing to them now in advance and telling them that I view it as an unlawful penalty clause as it does not reflect any losses they may suffer as a result of my early redemption. If they don’t co-operate now, my plan was to sell, let them make the deduction from the capital and then sue them.

 

Has anyone else dealt with the Co-Op Bank on one of these? Does my tactic seem like a sensible one?

Any other advice or hints would be appreciated, I have already read a lot on here which has been very useful.

 

Many thanks.

[zootscoot]

Hi Artoo,

 

Yes your plan sounds sensible. If they drop the charge all well and good although this is unlikely and if you dig your heels in at this stage they will only delay the sale. Best to pay up and then go for the money later.

 

Good luck

 

Zoot

[artoo]

Thanks zoot, I will keep this updated as things develop...

[zootscoot]

You might want to follow greenstuffs thread as she is in similar position. There is a letter in the thread you might want to adapt for use.

 

http://www.consumeractiongroup.co.uk/forum/mortgage-companies/24799-help-being-charged-redem.html

[artoo]

You might want to follow greenstuffs thread as she is in similar position. There is a letter in the thread you might want to adapt for use.

 

http://www.consumeractiongroup.co.uk/forum/mortgage-companies/24799-help-being-charged-redem.html

 

 

 

seen it, copied it and will steal it!

[artoo]

Okay letter drafted:

 

Please feel free to comment/steal.....

 

 

We are in the process of selling our property and as a result we will be forced to redeem our mortgage with the bank. We will not be purchasing another property immediately so we have no option to transfer the mortgage.

 

I was therefore concerned to see on the most recent Mortgage Account for the year ending 30 June 2006 that you intend to apply an Early Repayment Charge of £3,661.12 plus a Repayment Administration Fee of £195.00. It would appear that these charges would apply to any redemption of the mortgage prior to 27 July 2007.

 

At 30 June 2006 our outstanding balance on an initial loan of £124,500 was £122,037.58. The effect of the proposed charges would be to increase the outstanding balance to £125,893.70. Which, despite all the payments made over the terms of the mortgage is higher than the initial loan! That cannot possibly be correct. As a bank that promotes itself as an ethical bank it I find it hard to believe that you would impose such extortionate charges on your customers.

 

Apart from the ethics of the situation the proposed charges are also unenforceable in law as they amount to penalty clauses in the mortgage contract. As the amount of the penalties does not reduce over the term of the loan to any real extent, the penalties can’t be liquidated damages. The penalties you intend to impose do not appear to be a genuine pre-estimate of the anticipated loss which the bank would be likely to suffer in the event of a an early redemption of the mortgage.

 

If you could provide evidence of the bank’s anticipated losses that the early redemption will cause then please do so. Please also let me have the calculations that the bank used to justify the level of the charges in the first place. Only if the bank can show that the penalties are based on the actual anticipated costs would they be lawful.

 

The leading case is Dunlop Pneumatic Tyre Co Limited v New Garage & Motor Co Limited ([1915] A.C 79), which established the tests to distinguish penalties from liquidated damages.

 

 

 

 

 

 

The legal principles established by that case are that:

 

 A clause will be construed as a penalty clause if the sum specified is "extravagant and unconscionable" in comparison with the loss that could possibly have been proved as a result of the early redemption. I do not believe that the penalties equate to the bank’s anticipated losses in any way.

 

 It is likely to be a penalty if the breach of contract consists of not paying a sum of money and the sum stipulated as damages is greater than the sum which ought to have been paid. The penalties would mean that we would pay the bank more than was initially borrowed despite over a year of regular monthly payments.

 

 There is a presumption that if the same sum is stated to apply to different types of breach of contract, some of which are serious and others not, it is likely to be a penalty clause. We are not redeeming the mortgage to move our borrowing to another lender, due to personal circumstances we are having to sell our house and move to rented accommodation. It would appear that you intend to treat us the same as a person breaching the term of the contract by moving to another lender to take advantage of a preferential interest rate. I would suggest the treating the two situations as the same falls foul of this legal test.

 

You will also be aware of the impact of The Unfair Contract Terms Act 1977 which will in certain circumstances impose a test of reasonableness into contracts. Again if the penalty clause specifies a sum which is more than a genuine pre- estimate (and therefore a penalty) the clause will be unenforceable.

 

I would draw your attention to the following paragraph which is an excerpt from the Office Of Fair Trading website:

 

“A term in a mortgage agreement which requires the borrower to pay more for breaching the contract terms than actual costs and losses caused to the lender by the breach (or a genuine pre-estimate of that) is likely to be regarded as an unfair penalty and to be unenforceable both at common law and (in a consumer mortgage) under the Unfair Terms in Consumer Contracts Regulations.”

 

I would therefore be most grateful if you could respond to this letter confirming that upon redemption of the mortgage, which we anticipate will be in December 2006, you will not be deducting the Early Repayment Charge or the Repayment Administration Fee. We do not consent to those sums being deducted from the proceeds of sale. If you do not agree and the sums are deducted then I will take steps to recover the sums deducted through the courts. I do hope that would not be necessary and that we can resolve the matter amicably.

 

I look forward to hearing from you.

 

Your sincerely