Lender added pounds 2,000 costs to mortgage defaulter's bill: A borrower who wanted to pay off her loan after legal action had started got a nasty shock. Sue Fieldman reports

IF YOU default on your mortgage, lenders can automatically add their legal and administrative costs to your mortgage account. These can run into many hundreds of pounds, particularly if legal action is taken against you for non-payment.

In June 1992, Jill P of Cambridgeshire took out a loan of pounds 3,696 secured on her home. She was shocked to find that when she paid off the loan one year later she had to pay pounds 7,556 - more than pounds 2,000 of which was legal and administrative costs.

The loan was with a company called Equity Home Loans (No 2) Ltd of Borehamwood, Hertfordshire. The loan was to be repaid by 144 monthly instalments of pounds 90.35, making an APR of 39.2 per cent - not unusual for second mortgages for distressed borrowers.

Mrs P made patchy repayments, and soon got into arrears. EHL started legal action.

She decided to redeem the loan quickly and take out a new loan with another company to try to clear all her debts.

Mrs P says: 'The amount I needed to pay off the loan was so much higher than I expected that I have not been able to clear my other debts. I have no choice now but to try and sell my house and buy a smaller one.'

Mrs P queried the redemption figures with EHL. EHL said that pounds 545 was a default and administration charge levied by the company. It would not have been payable if she had not defaulted on the loan.

Several weeks ago we asked EHL for a breakdown of the pounds 545 charge on Mrs P's behalf. She has not yet received it.

Mrs P paid EHL's solicitors, Brand Montague of South Harrow, Middlesex, pounds 7,556 to redeem the loan. The actual amount required by EHL was pounds 6,063. According to EHL, the difference of pounds 1,493 was 'our solicitor's costs in acting in litigation' because of Mrs P's default under the terms of the loan.

Mrs P queried the amount of Brand Montague's legal costs. She has not received an itemised bill.

Brand Montague said: 'It is not our client's (EHL's) practice to require us to prepare detailed bills for them.' The level of fees 'has been specifically agreed with our client'.

Brand Montague did say that its fees related to having written 22 letters and having received 17, and there being six recorded telephone conversations, 'although in fact there were many more'. Overall the time spent had been estimated at more than seven hours.

EHL's loan agreement says that, in the event of a default, it can look to the borrower to pay any administration and legal costs and disbursements. Similar clauses are found in other lenders' mortgage terms.

Most borrowers think there is nothing they can do about the automatic addition of legal costs to their debt.

However, Jeremy Morgan, a barrister who specialises in costs, says: 'The court, when considering the costs of the possession action, has power to direct that the mortgagee's costs should not be added to the mortgage debt.'

A borrower can also attack a lender's claim for costs by getting the legal bill checked by the court or taxed, in the same way as the solicitor's own client.

If the bill has been paid you have to act promptly or you will lose your right to apply for taxation.