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Sunday, 19 August, 2001, 07:41 GMT 08:41 UK
Lenders target 'rate tarts'
'Rate tarts'
'Rate tarts' make the most of a special deal, then leave
Lenders have hit back at 'rate tarts' - people who switch mortgage deals frequently - by making it more difficult for them to change their mortgages.

More lenders are introducing extended redemption penalties on mortgages, making it difficult and expensive for customers to switch after the special rate that initially attracted them has expired.

The practise had been on the wane, following widespread public criticism.

They pull people in at very attractive rates, but they are now worried that these people are going to hop around, so they impose these penalties to prevent them moving

David Hollingworth of London & Country

Experts say that the practice is aimed at clawing back margins in an increasingly competitive mortgage market.

Lenders hit back

Extended redemption penalties or extended lock-in clauses are one of the easiest ways for consumers to be caught out.

Lenders use a very low rate to attract borrowers into the deal, but when the rate increases they cannot move elsewhere without incurring a hefty penalty.

Some deals lock customers in for up to three years after their special offer has expired - and some may eventually offer a worse rate than offered with their standard variable rate deals.

Experts say that lenders are merely seeking to hit back at 'rate tarts', a growing number of financially literate borrowers who move from one lender's best-buy deal to the next as soon as the special rate has expired.

Mortgage companies have responded by saying the move is necessary to protect their margins.

While it is common for lenders to impose lock-in clauses during the special deal period, more lenders are tying in customers beyond the special rate.

Bristol & West

  • Bristol & West now has extended penalties on five of its core mortgage deals.

    In January, while it had extended lock-ins on a number of deals it had none in its core residential deals.

    They had never phased out extended redemption penalties but they had increased the number of deals which carried the clauses, a Bristol & West spokesman said.

    He said: "We are in the same situation [as other lenders]. There are some serial remortgages who are getting the best deals they can."

    Standard Life

  • Standard Life Bank has never imposed extended redemption penalties, but its new Simply Freestyle mortgage will tie borrowers in for a further two years after its 2% two-year discount ends.

    John Gill, finance director of Standard Life Bank said that "something had to give" if they offered an attractive discount in the first few years.

    Britannic Money

  • Britannic Money had not imposed extended penalties for 'a couple of years'.

    Now, it has two 'flexible start' three year stepped discounts deals which include these penalties.

    For example, one offers a 2.5% discount in year one and then 1% off in years two and three. However, you will be tied in for a total of five years.

    The penalties in each of the five years are on a sliding scale from 5% in year one to 3% in year five.

    John Gill, Standard Life Bank
    "Something has got to give".
    See also:

    02 Jul 01 | Northern Ireland
    Householders 'not heeding' endowment advice
    30 Jul 01 | Business
    Q&A: How to manage debt
    18 Sep 00 | Business
    A guide through the mortgage maze
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