Mortgage 'lock-in' action

"Lock-ins" can cost savers and borrowers thousands of pounds

The Office of Fair Trading (OFT) is to issue new guidelines to banks and building societies on the rates they can charge savers and borrowers who are "locked in" to their accounts.

Lock-ins include penalties for paying back a mortgage early after a fixed or discounted period or losing interest when withdrawing savings.

The practice can cost the saver or borrower hundreds, if not thousands of pounds a year. John Bridgeman, Director General of Fair Trading, said it was "unacceptable for banks and building societies to vary interest rates uncompetitively for savers and borrowers who are 'locked' into accounts."

He said the most vulnerable customers were those without a good credit rating - known as non-status borrowers.

"Many of these borrowers are not in a position to shop around for better deals because they have poor credit ratings," Mr Bridgeman said.

Court action threat

His action is aimed at lenders who increase interest rates for those locked in to mortgages for reasons such as "to maintain the profitability of the bank" or "in the interests of shareholders".

Guidelines for lenders say those who change their rates for those locked in to its products must notify each affected customer in writing at least 30 days before the change.

Customers must then be allowed to repay the whole loan in the following three months without having to pay any early repayment charge.

Failure to comply with the guidelines may lead to the director general taking court action against the use of unfair terms by the organisation concerned.

Last month, the government announced a shake-up of the mortgage industry.

It announced that key aspects of regulating the industry were to be handed over to the "super watchdog", the Financial Services Authority (FSA).

The industry's image has been dented in recent years, with concerns over lock-in clauses, endowment mortgages and overpriced home insurance tied to mortgages.