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By Naomi Caine

You might expect to pay a fee to arrange a mortgage - although £499 is a bit steep. But did you know that you also have to pay a fee when you redeem your home loan, either to pay off the debt or to switch to another lender?

Most banks and building societies these days charge an exit fee, sometimes called a mortgage exit administration or redemption administration charge. And the cost has risen sharply over the past few years. The fees, which can be as high as £295, have climbed from an average of about £50 in 1996 to £225 today.

Abbey and NatWest both charged £85 five years ago; they now hit borrowers with an exit fee of £225. Woolwich has also raised its exit fee from £95 to £275, according to Moneyfacts, which collects financial data.

Experts estimate the increase will rake in £10 million in extra profits for Abbey, given that one in four borrowers switches lender every year.

Lenders claim the fees cover administration costs, such as dealing with the Land Registry. But Nationwide manages to do the same job for £90. In fact, the building society did not charge anything until last year. HSBC is now the only big lender that does not impose exit fees.

The fees have been criticised by some mortgage experts who say they bear no relation to lenders' costs. They are also often tucked away in the small print of an application.
Nick Gardner of Chase de Vere, a mortgage broker, says: "It actually costs lenders between £60 and £70 to redeem a mortgage, so they stand accused of profiteering. It is also an underhand way to ramp up the cost of borrowing. Lenders can't put up interest rates in such a competitive market, when the base rate has not moved, so they put up fees instead."

Lenders can also raise the fees without seeking the agreement of the borrower, so you don't really have any idea how much you might have to pay when you redeem your loan.
David Hollingworth of London & Country, a mortgage broker, says: "The fees have certainly irritated borrowers. They don't understand why the increases have been so huge - and they certainly don't like the fact that the fee can go up during the term of the mortgage."

Are the fees legal?

Some lawyers even question the legality of the mounting exit fee. Adam Samuel, a London-based lawyer, says: "What makes it illegal is if the lender can change the fee from, say, £70 to £200 without either obtaining the customer's agreement or using any objective standard by which to measure that amount."

Alliance & Leicester has reacted to the public pressure by fixing exit fees. But at £295 it is the most expensive among the big lenders. Northern Rock follows the same policy but it charges £250.

Moneysupermarket.com, the price comparison website, wants all lenders to fix exit fees. "Consumers will find it easier to compare deals if banks and building societies guarantee that exit fees will stay the same from the day the contract is signed," says Louise Cuming, moneysupermarket's head of mortgages. However, she describes Alliance & Leicester's fee as "excessive."

The Financial Services Authority (FSA), the City watchdog, has now stepped in to investigate mortgage exit fees. It believes that sudden, big rises in the fees could be unfair and unjustifiable, particularly as electronic systems have made the process quicker and cheaper.
The FSA says: "It is not clear that increases in exit fees are proportionate to any increases in associated costs incurred. We have asked some lenders to consider whether their terms might be unfair, and to provide evidence of how decisions to increase their fees were taken."
If it concludes the fees are unjustified, lenders could face court action and be forced to cut the charges.

How to fight the fees

But you shouldn't wait for the FSA to reach its conclusions before you challenge an exit fee. First, complain to the lender, stating why you think the charge is too high. You will have a particularly strong case if the fee has gone up sharply since you took out the loan.
You must give the lender eight weeks to respond to your complaint. If it doesn't cut the fee to the amount quoted when you signed up to the mortgage, you should complain to the Financial Ombudsman Service (FOS).

The FOS is an independent service that resolves disputes between consumers and financial firms. You can either download and complete a complaint form from the website (www.financial-ombudsman.org.uk) or speak to its consumer helpline (0845 080 1800). You may also have to send the FOS further documentation to support your case.
Hopefully, you won't have to go to the trouble of lodging a complaint with the FOS. Melanie Bien of Savills Private Finance, a mortgage broker, says most borrowers are successful when they challenge their lender. "The FSA's decision to query exit fees suggests that lenders are on shaky ground and they know it," she says. "Most lenders will back down because they don't want the case referred to the ombudsman."

The variable exit fees make it more difficult to compare mortgages and choose the right deal, but don't let them put you off switching. Many people can still save money by moving to different lender - and you shouldn't base your decision on exit fees alone.