Personal Finance: The great mortgage swindle

Tougher laws on home loans would lift the curtain on hidden costs and cut your payments.

Mortgages; we love them and we hate them. Building societies and banks have grown fat on the pounds 470bn industry, but without them we would never have enjoyed the boom in home ownership, which has done so much to improve the quality of housing in Britain.

Yet the absence of tough laws to protect homebuyers has left us at the mercy of lenders. Their control over how much we pay - and for how long - gives them the scope not only to manipulate the housing market, but to dictate the way we live our lives.

The Treasury this week launched a consultation process which looks set to lead to new laws to tame the mortgage jungle. It is canvassing the views of Britain's 10 million borrowers (who borrowed a record pounds 11bn last month) as well those involved in the lending business.

Intense competition, which works in the customer's favour, has one major drawback. Any deal you sign today may well be bettered by another launched tomorrow: a bitter pill many borrowers are unable to swallow. Complaints against mortgage lenders are at a zenith, yet lenders have escaped almost scot free from scandals which could have cost them dear, had they been as inept at PR as the life insurance industry.

Top of the list is the mis-selling of inflexible endowment mortgages, which tie people into a 25-year term and in some cases may not repay the loan on maturity. Amazingly, one in three loans sold today is still an endowment. Lenders' freedom to charge whatever they like for a loan has incensed other borrowers, who are furious their mortgage rate is nearly 2 per cent above the Bank of England base lending rate, and who accuse institutions of lining their pockets instead of passing on interest rate cuts. Indeed, holding back a 1 per cent rate fall saves the industry nearly pounds 500m a month.

The way interest is calculated is another running sore. Traditionally, lenders have calculated how much interest a borrower should pay and the size of their repayments at the end of the year - repayments made through the year are not taken into account until then. The arrival of flexible mortgages has shown how the overall cost of a loan can be cut by thousands of pounds by calculating interest daily, and reducing the outstanding balance throughout the year, thus saving interest.

Onerous redemption penalties are another concern, particularly where these last beyond the period of a discount, or were not clearly pointed out to the borrower at the outset. There is evidence that even reputable borrowers are not explaining these as clearly as they should.

Mortgage indemnity insurance has also set borrowers' teeth grinding. Anyone with less than a 25 per cent deposit may be asked to pay a one- off premium running into thousands of pounds, to protect the lender again the loan going sour. In other words, home owners pay a hefty premium for an insurance from which they will not benefit. And even when such a policy is in place, borrowers can still be chased by the insurer for any money it pays to the bank or building society where the loan defaults.

Tying hot mortgage deals to compulsory insurance is still seen as unfair, because of the huge cost of those premiums. Many borrowers fail to realise they are paying well over the odds for mortgage-linked cover.

The cloak-and-daggery involved in under-the-counter deals is also annoying. Many of the keenest mortgages are designed to attract new loans, and are not available for existing customers. But if you threaten to remortgage elsewhere, doors will often open.

A shaming litany of complaints. But to be fair, most reputable lenders are trying to run solvent businesses, protect their employees' jobs and meet their customers needs. They can convincingly rebuff many of the allegations listed above.

How can they reduce mortgage rates further and protect their savers? Redemption penalties allow for more competitive deals, even where they overhang. What would happen to cashback deals if a penalty was never permitted to outlive the benefit? And so on. But borrowers are justified in demanding a legislative framework to provide transparent loans and recourse to redress and compensation when something goes wrong.

Labour MP Paul Flynn says: "Most MPs are aware of people in their constituency who have been ripped off. Homebuyers are like lambs to the slaughter. The industry has mis-sold mortgages, driven by commission and self-interest."

One of the suggestions from the Treasury is that if mortgages were subject to statutory regulation within the Financial Services Act, then the regulator could produce comparative information allowing consumers to compare deals. It is also considering the practicality of authorising all mortgage advisers, as financial advisers are, and using the FSA to control advertising, the quality of advice, disclosure of penalties and compensation.

Statutory regulation could push up costs, which might work against consumers' best interests. Although Britain's biggest lender, the Halifax, favours statutory regulation, others say that the current hotchpotch of arrangements, based largely on a code of conduct, work well.

But to allow institutions with such power over both our lives and the economy to continue operating completely unshackled seems, at best, a little careless. Remember, mortgage in haste, and you will repent at leisure.

WHAT DOES THE TREASURY PROPOSE?

THE TREASURY will be investigating several areas:

Lock-ins, where borrowers are offered very low rates for a limited period, then forced on to that lender's variable rate for two or three years with heavy penalties for switching loans.

Failure to cut borrowers' interest when the Bank of England reduces base rates. Most lenders refused to cut rates the last two times the Bank did. Those that did, trimmed by less than the full 0.5 per cent cut.

"Bundled" mortgages, which force borrowers to buy the lender's home and contents insurance, even their accident, sickness and unemployment cover. Massive commissions paid for selling these products can add up to 0.25 per cent on the rate being charged.