Personal Finance: The Treasury will investigate the true costs of mortgages. About time, too

SO THE rumours and the leaks were right after all. The Treasury this week confirmed it will be investigating the activities of mortgage lenders. Statutory controls on the industry, with lenders being regulated by the new City watchdog, the Financial Services Authority (FSA), are likely.

This direct oversight is long overdue. Mortgage lenders knew they were drinking in the Last Chance Saloon even as they continued to argue the merits of voluntary codes of practice for themselves.

There wasn't much chance of this state of affairs being allowed to last as long as they gave ridiculous excuses for not cutting the monthly cost of their loans when the Bank of England reduced its base rate. They say they don't want to "penalise" savers who provide the money which is lent to borrowers.

They also argue they must keep mortgage rates up because their own admin costs mean the margin between the average paid out to savers and that charged to borrowers cannot be reduced further.

But an increasing proportion of the money lent out doesn't come from savers but from money markets. In other words, there is less connection between the two functions. And in any case, at a time of cost reductions, which should mean cheaper administration costs, the margin between savings and loans has risen. So many lenders, particularly the big banks, are making more profits out of us.

Moreover, what about the marketing of bizarre products, such as "bundled" or "conditional" mortgages? These are loans where you get to enjoy a special rate for a limited period as long as you also bought into both the lenders' household and contents insurance.

There is nothing wrong with that - until you realise that the true cost of that insurance, when compared to cheaper alternatives that are available elsewhere, far outstripped any savings from the extra 0.1 or 0.2 per cent a borrower might manage to shave off a three-year fixed rate.

The real reason why such bundling happens is that lenders stand to gain up to 25 per cent or more in commission from the sale of such insurance products, much more if they own the insurer that packages them, as do some of the larger ones.

Unlike mortgages with long redemption "overhangs", where at least you get the benefit of a reduced rate for a period of time in return for staying with that lender after the deal ends, bundled products make it very hard for punters to work out the true cost of one loan compared to another. Which is precisely what lenders want.

Of course, it could be argued that independent advice is available to borrowers from thousands of members of various mortgage networks. However, as is becoming increasingly obvious, many advisers are content to flog the latest products that their head office makes available to them.

The Mortgage Code of Practice theoretically applies to intermediaries, too. However, recent events at the Register of Intermediaries - the office that supposedly co-ordinates its members' compliance with the code - don't inspire that much confidence. Bosses there sacked their compliance chief after he published a report showing that it wasn't working.

In the short term, what we need is for mortgage advice to be regulated in exactly the same way as pensions or other investments.

In the longer term, mortgage products themselves need to be made less opaque and packaged in a way that anyone can understand.

It is a scandal that so few lenders bother to do so at present.