Avoid being stung by sneaky fees (part one)
We all know we're supposed to read the small print when signing up to new financial services, but with so much jargon to wade through it’s not surprising that so many of us don’t. In fact, more than half of new broadband customers admitted to not looking at the small print when signing contracts, in research by moneysupermarket.com.
But this is exactly where details of fees and penalties will be lurking, so not reading it could leave you open to an onslaught of different charges for just using or closing your account.
While most of these of sneaky fees are here to stay, being aware of charges will at least help you to avoid getting stung and help you find the best value deals.
Here's the Moneywise guide to fees and penalties. It's no substitute to reading small print, but gives you pointers as to what to look out for in those reams of black and white matter.
Mortgage rates are key in determining how much the loan will cost you each month, but fees that are charged when you take out a new deal, end an existing one, repay early or make an overpayment, should all be taken into account because they can add a chunk to the overall cost.
If you’re planning to remortgage or have done so recently, you’ve probably come across a ‘mortgage exit fee.’ The average fee charged by lenders is £75 to £200, according to the Financial Services Authority (FSA), although some charge up to £300. The fee is not a penalty for leaving early, but covers the ‘administration’ costs of closing the loan.
These fees have come under scrutiny over the past couple of years because many lenders have hiked the fee from what was stated in original contracts. In January 2007, the FSA told lenders they must justify these increases and announced that customers who have been overcharged can make a claim for a refund. If you’ve been caught out you can still make backdated claims.
When you take out a mortgage you’re also likely to get stung with an arrangement fee. It varies considerably between lenders and products; most charge a flat fee, which could be as little as £500 on some loans to £1,500 on the deals with the best rate. More lenders however are introducing a percentage-based fee, meaning the more you borrow the bigger the fee.
This can make choosing the right deal confusing - whether a great rate with huge fee will work out cheaper than a less attractive rate with a lower fee will depend on your circumstances. As a rule of thumb, if you have a large mortgage it’s worth stumping up a bigger fee to get the lower rate, but if your mortgage is only small you should focus on those deals with the lowest fees.
First-time buyers can also get hit with a higher lending charge (HLC) which are often levied if you have a small deposit and need to borrow a high proportion of the property’s value - usually over 90%.
About a third of lenders issue the charge, which averages around £1,500 and it buys a form of insurance for the provider that pays out if you default on your mortgage. If the property is repossessed and the sale proceeds cannot cover the outstanding mortgage, this policy will cover the shortfall.
To avoid the charge, your options are to go for a lender that doesn’t levy it or save up more for a deposit, which is a good idea anyway in the current financial market.
Look out for penalties for overpaying and early repayment. An early repayment charge (ERC) is different to a mortgage exit fee. It is levied on certain types of loan - usually discounted or fixed-rate loans - if you pay off the debt within the term of your deal. The charge is usually expressed as a percentage of the outstanding loan.
So for example, if someone with a £100,000 mortgage on a two-year fixed-rate deal with an ERC of 2% wanted remortgage after 12 months – they would face a charge of £2,000.
Most mortgage deals allow borrowers to make an overpayment of 10% each year, but the ERC will be levied if you exceed this amount. Some lenders offer flexible mortgages with unlimited overpayments, so look out for this if you anticipate making regular overpayments or an occasional lump sum to get your mortgage down.
If you’ve ever exceeded your credit limit or made a late payment and been hit with a penalty charges, you’re not alone. Around 10.2 million Brits got stung with credit card penalty fees last year, according to Moneysupermarket.
Up until 2006, providers were charging up to £35 a time but following an investigation, the Official of Fair Trading ruled that these fees were unfair.
Most credit card companies have brought their penalty fees down to £12, because they OFT ruled that those who didn’t would have to provide evidence to explain why. If you’ve faced higher charges in the past, it is possible to reclaim them now.
To avoid being stung in the first place, it’s important to get your finances in order. The best way to ensure you don’t miss a payment is to set up a direct debit to pay the minimum repayment each month at the very least – but ideally a good chunk more so you don’t end up paying over the odds in interest.
If your credit card bill arrives at an inconvenient time of the month, in the week before payday for example, ask your provider for an alternative issue date.
Telephone and broadband
You sign up to a contract and pay a monthly fee for the service you receive, right? Wrong. Customers face a barrage of fees and penalties, many of which you’ll be completely unaware of until you get stung.
Missing a payment or paying late incurs some hefty charges, and this is the area where most people get caught out, says moneysupermarket. It found that charges can be as much as £25 plus VAT but that the cost of missed payments are quite tricky to find in the terms and conditions of many companies. When checking it your providers charges a late payment fees, you should also see whether interest will be levied against late payments.
Opting to pay on receipt of a bill instead of by direct debit can also levy a fee of up to £5 a month. And some providers will charge customes who request paper bills instead of managing their accounts online. Although they justify this charge as covering postal costs and being as environmentally friendly, they are really just a way to claw in more money.
You could also face penalties of £50 if you terminate a contract or cancel in the first 12 months.
Then there’s set up or connection charges and the cost of phoning for technical support to consider, which at can add a chunk to the cost of a service.
Broadband set up costs vary considerably. According to Broadbandchoices.co.uk, some don’t levy a set up fee but charge for equipment.
With growing competition in the broadband market, providers have lowered headline rates, only to bump up the cost of calling essential technical support lines and customer services. Some providers offer a free or local rate number for sales and customer services, but technical support - which you’ll have no choice but to call at some point, could be a premium rate number and cost up to 50p a minute.
So what can you do? Well, when shopping around it’s important to take all these charges into account, because they will determine the overall cost of taking out a certain package. Unsurprisingly, providers don’t always make fees and penalties clear - so it’s worth calling the provider to double check before you sign up.
You can also avoid extortionate customer service numbers by visiting a website called Saynoto0870.com, which lists alternatives to premium rate numbers such as 0870, 0845 and 0870.
A sneaky insurance fee often applied when you take out a loan, credit card or mortgage, is payment protection insurance (PPI). It is intended to cover repayments if you are unable to make them, due to reasons such as being unable to work due to accident or illness, or being made redundant.
However, it is expensive - adding around 25% to the cost of a loan - and can be difficult to claim on. There is evidence that PPI has been mis-sold because people have unknowingly agreed to it, or been forced into taking it out.
So what should you do? You may not be aware that you have PPI, so if you have taken out any form of credit contact your lender to find out if you are unsure. If you do have it, there’s a chance you have been mis-sold it and you may be able to claim your money back. Read our guide to reclaiming PPI premiums and download a template claims letter.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Not to be confused with an early repayment charge (ERC). Exit fees are levied on top of ERCs, which are a method of clawing back lost interest on a loan repaid early. By contrast, exit fees are charged for the administrative work this entails. They are charged as flat fees, from £150 to £300. However, in January 2007, following mortgage lenders surreptitiously raising fees sometimes by fivefold, the Financial Services Authority (FSA) intervened and most mortgage lenders removed exit fees from new mortgages. If you paid exit fees on your mortgage before January 2007, you may be able to claim them back.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.