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Sunday, 17 October, 1999, 16:02 GMT
Q&A: Are mortgages a rip-off?
The UK's top mortgage lenders have been accused by the Consumers' Association of unfair practices. BBC personal finance correspondent Andrew Verity considers what the report means for lenders and borrowers alike.
Why has this report come now - have lenders become more devious over time?
Not really. If anything, their standards of conduct have improved in recent years.
A few weeks ago the Local Government Association published a report of an undercover survey done by trading standards officers. It found many mortgage advisers and brokers were ignoring the mortgage industry's voluntary code of conduct.
The government has also been consulting about whether to launch proper, legal regulation of the mortgage market. The consultation ends on Friday 22 October, and statutory regulation, supervised by the new financial "super-regulator", the Financial Services Authority, looks increasing likely.
If the Treasury goes for statutory regulation, it will be included as part of the Financial Services and Markets Bill, now making its way through Parliament.
What are the problems identified by the Consumers' Association?
Actually they've all been identified already in campaigns by national newspapers. They all involve what the CA perceives to be "unfair terms" in mortgages.
The most common example is the "bait and hook" mortgage. This is where a borrower can get a lower fixed rate, say 5.5% for five years (the bait), but is then locked in (or "hooked") for another two or three years on a higher, variable rate. If they want to switch to a better mortgage they may have to pay a "redemption penalty" amounting to thousands of pounds. These are also known as "extended lock-ins".
Another is known as "bundling". This is where borrowers are offered an interest rate lower than most others on the market. The snag is that borrowers must buy overpriced buildings insurance from the lender. The lender gets a chunky commission from the insurer which issues the policy. Customers typically end up paying as much as they would if the interest rate had been at the market rate.
This marketing gimmick is particularly controversial because it prevents customers shopping around for better insurance deals. Buying buildings insurance from a lender typically costs much more than buying direct from an insurer.
Another is annual interest calculations. This is where the interest on a loan is worked out every year rather than every day or every month. It means your payments don't reduce the nominal value of the loan, and therefore the amount of interest you pay, until the end of December each year. A borrower with a £75,000 mortgage loses £75 a year because of this.
Are the mortgage lenders involved in sharp practice and should we be accusing them of "scams"?
It's debatable. Bait and hook mortgages (or "extended lock-ins") are illegal in countries such as the Republic of Ireland.
But some experts say customers should be free to choose a lower rate in exchange for being bound in to a higher rate in later years.
Because there are few laws to regulate the UK's mortgage industry, it's not clear that lenders are doing anything wrong.
Arguably, practices like "bundling" are perfectly legitimate marketing gimmicks. The principle of Caveat Emptor, or "buyer beware", applies. The trouble with that argument is that it's becoming obvious that many customers have too little information on which to make a considered decision. Many put themselves in the hands of advisers and brokers, little realising that commission and profits may have an effect on the advice they get.
Annual interest calculations are not really a scam, but a symptom of technological backwardness. Some lenders are moving to daily interest. But that involves a complex and expensive overhaul of the lender's IT systems.
The overwhelming majority of mortgages are done on this basis, and even £75 a year is only 0.1% of the average mortgage. It does make a difference when borrowers make early repayments to reduce their mortgage debt.
If the repayment is made in January, it has no effect on monthly payments until the following year. The answer is to pay extra in December, rather than January.
The word "scams" should be used with caution. One man's scam is another man's legitimate marketing.
Are there any big lenders not considered guilty of unfair practices?
Very few. But not everyone would accuse them of being unfair. Free market purists would say they are doing absolutely nothing wrong.
How do I know whether I've been treated unfairly?
Look at the small print of your mortgage and see if it entails any of the practices mentioned above. If you weren't made aware of them, then you may have been given bad advice. If you were fully informed, you haven't been treated unfairly.
Has this got anything to do with mis-selling? Yes and no. The Consumers' Association is talking about unfair mortage terms. Mis-selling has to do with the advice you were given at the time of the sale.
The issue of mis-selling of endowments is related, but distinct.
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