Barclays Bank Overhauls Early-Redemption Penalty System

Barclays Bank has announced changes to the way it calculates early-redemption penalties on fixed-rate mortgages, in an effort to make the process more fair and reflect the actual costs incurred by the bank. The new system takes into account both the length of term the fix has yet to run and the prevailing interest rates, resulting in a more complex but more accurate calculation. Borrowers who opt out early due to falling interest rates, however, may face an increase rather than a decrease in the penalty.

Key Takeaways:

• The new system calculates early-redemption penalties based on the length of term the fix has yet to run and the prevailing interest rates.
• This change is a departure from most lenders, who use a mish-mash of flat and graded penalties.
• The Halifax charges a penalty based on the amount of gross monthly interest payable under the particular loan, while the Household Mortgage Corporation charges a flat redemption fee of three months' gross interest on fixed-rate mortgages.
• Barclays' Head of Mortgages, Garry Skelton, states that the new system aims to eliminate cross-subsidization between customers and predicts that other lenders may follow suit.
• Borrowers who opt out early due to falling interest rates may face an increase rather than a decrease in the penalty.
• Upfront fees and redemption penalties can make swapping fixed rates in mid-stream costly.
• The change ensures that the terms of the gamble for fixed-rate mortgages are fairer than might otherwise have been the case.

Statistics:

• Barclays' previous system charged a penalty of five months' interest on a five-year fixed rate, regardless of the borrower's term length.
• The new system takes into account both the length of term and the prevailing interest rates.
• The Halifax charges five monthly interest payments if borrowers opt out before January 1995, four before January 1996, and three thereafter if they have a 7.75% fixed interest rate until January 1999.
• The Household Mortgage Corporation charges three months' interest in the first year, falling to one month's interest in the third year, and nothing thereafter, as long as one month's notice is given for variable-rate loans.

Sources:

• The Sunday Times, 1994