Fixed-rate deals could be costly
Watch out for the mortgage `lock-in'
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Your support makes all the difference.WHAT PRICE that highly attr-active fixed rate mortgage? According to the Office of Fair Trading, it could turn out to cost far more than you bargained for.
The OFT warned this week that borrowers lured by exceptionally cheap fixed-rate mortgage deals could find themselves locked in to paying extortionate variable rates later on. This is because some contracts lock people in for years after the fixed-rate period ends, during which lenders could charge whatever interest rate they choose.
An OFT spokesman says: "Mortgage contracts that give unrestricted power to a lender to vary terms for captive consumers create an imbalance which could be considered unfair [although we] are not opposed to mortgage agreements where borrowers are `locked in'."
With the proper information customers might choose to pay more interest in the first place, thus avoiding the lock-in. The OFT says: "Borrowers should be given information, when they sign the contract, on how interest rates will be set in the future."
The OFT's warning is being taken by the mortgage industry as a sign that if it does not alter its practices it could face a full-scale inquiry. The result could be to bring about tougher regulations for lenders at a time when it is already trying to give bite to its newly-introduced voluntary Code of Mortgage Practice. The OFT's warning may lead to many of the cheaper fixed-rate products being removed from the mortgage market, depriving borrowers of choice.
Michael Coogan, director general of the Council of Mortgage Lenders (CML), said: "We are concentrating on the issue of transparency." He argues that lenders are unlikely to try to punish borrowers by artificially raising rates at the end of the fixed period but says it is important that customers should be aware of the financial implementations of lock-in periods.
The Government is currently examining the impact of the voluntary code, before deciding whether to make mortgages subject to statutory controls. However, the OFT stresses that it is not examining any specific contracts. Its staff will be talking talk to lenders about the "potential for unfairness".
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