Money: Home buyers warned of excessive interest rates

Trading standards officers have warned prospective home buyers to read their mortgage contracts carefully to avoid being locked into excessive charges if they go into arrears. Although dual-rate mortgages are rarely offered by the banks and building societies, they are being marketed by at least one lender.

The Office of Fair Trading has been asked a trading standards department to investigate the City Mortgage Corporation, which specialises in selling loans to borrowers at the bottom end of the market but which levies very high charges to those who miss repayments.

CMC promotes itself heavily to council tenants who are entitled to large right-to-buy discounts. Many might have found it difficult to get loans from the big banks and building societies. Tenants are told they are missing out on "a typical saving of pounds 24,000" by not buying their own home.

But tenants have to read contracts carefully to find out they could end up paying interest rates of more than 20 per cent, compared with normal mortgage rates of about 7 per cent. Advertisements and leaflets mailed to council tenants, which have been seen by the Independent on Sunday, did not quote the company's interest rates.

In relation to the selling practices used in just one case, the East Riding council in Yorkshire is considering prosecuting a broker promoting CMC mortgages. The council's trading standards officer, John Nicholson, said: "I'm concerned about concessionary rates which, if the mortgage is not paid on time, can lead to defaulters being sued for a much higher rate. I have referred a product to the Office of Fair Trading, partlyunder the provisions of extortionate credit bargain, contained in the 1974 Consumer Credit Act."

Mr Nicholson calculates that on a pounds 25,000, 25-year repayment mortgage, where a 7 per cent standard mortgage would require a total repayment of pounds 53,000, a CMC mortgage at its "concessionary rate" would require repayment of more than pounds 86,000. At the CMC's "standard rate", invoked if any payments are missed, a borrower would have to pay a colossal pounds 137,000. The concessionary rate is quoted by CMC as being 9.9 per cent, but Mr Nicholson says it can work out at 13.375 per cent. The standard rate, stated to be 18 per cent, could be 21.875 per cent.

Peter Kenway is director of the New Policy Institute and author of a recent report on mortgages which called for stronger control of their sales. He says: "This practice increases the risk enormously to the borrower in a way that seems punitive and can lead to early eviction. It's like being overdrawn at the bank by a pound and being charged pounds 50. People are encouraged to take a risk, the downside of which is enormous. It should carry a very severe health risk. It would be right to ban it."

One person who borrowed from CMC said the loan jumped in two months from pounds 58,000 to pounds 72,280 because of the system used to calculate repayments.

Lenders are permitted under dual-rate mortgage contracts to increase interest rates by as much as double as soon as borrowers go into arrears. The Office of Fair Trading advised the Department of Trade and Industry and the Treasury two and a half years ago to make the practice illegal. But a Treasury spokeswoman said her department was not proposing to ban it. She said the onus was on borrowers to read contracts carefully.

The Opposition's consumer affairs spokesman, Nigel Griffiths MP, said that a Labour administration would introduce retrospective legislation to invalidate dual-rate contracts. He also plans to raise the CMC case in Parliament and is calling on the Department of the Environment to remove CMC from its approved list of lenders for council tenants eligible for large discounts under right-to-buy legislation.

Michael Moss, customer services director of CMC, strongly denies that borrowers might not understand the risk of higher-rate interest charges if they miss payments. He said CMC's leaflets were fully explanatory, and had even won a Plain English award. "Our dual-rate product does not impose a higher rate for circumstances where the borrower is unable to pay," he said. "There is only one rate chargeable against which the borrower is entitled to a discount should they make their payment on the due date."

John Fox, a trading standards officer for Leicestershire County Council, advises people always to ask lenders for written quotes, which must legally include the interest rates payable. He advises home buyers only to use reputable mortgage brokers, whose fees should be no more than 1 per cent of a mortgage.

Buyers whose credit ratings are classed as high risk can use specialist lenders, such as the Kensington Mortgage Company (0990 561010), which is willing to lend at rates only slightly higher than standard mortgages.

The Council of Mortgage Lenders, meanwhile, warns that people having difficulty obtaining a mortgage should think hard about borrowing at all.