Money: The moral maison

How ethical is your mortgage? Here's how to ensure it's in line with your standards.
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The Independent Culture
Taking a mortgage is the biggest single financial commitment many of us ever make. Ethically minded home-owners face tricky choices when it comes to selecting a loan that meets their moral standards. A clear understanding of how mortgage lenders differ in their overall business policies can help. Even so, a degree of pragmatism both in terms of where you borrow and how you repay a loan may be necessary.

The provision of domestic mortgages in the UK is dominated by two types of lender: banks and building societies. The key difference between these from an ethical investor's point of view is that banks borrow and lend on the international money markets and building societies do not.

Because of their mutual status, building societies must restrict their core business to taking deposits from and lending to individual members of the public. This means that they are almost wholly free of involvement in areas of business that the ethically minded regard as unacceptable.

By contrast, all of the "Big Four" clearing banks - Barclays, Lloyds- TSB, Midland and NatWest - have been involved in areas such as the provision of Third World debt, or of trade credits to governments buying weapons from the UK.

International banking activity is swathed in secrecy. "Confidentiality" is crucial to the success or failure of at least some of the business they carry out but also a convenient answer to critics. As a result, choosing a bank on the basis of areas it avoids is practically impossible. The same applies to a small but growing number of "direct lender" mortgage providers, who are independent of large banks. These borrow on the international money markets, then re-badge and lend the same money to individual borrowers.

Two banks, the Co-Operative Bank and the much smaller Triados Bank, follow ethical guidelines in their conduct of business but neither offer mortgages. Of the larger clearing banks, Abbey National says it does not lend direct to companies; about 40 per cent of the pounds 151bn assets controlled by the bank are in UK mortgages. The Abbey also has a strong environmental policy.

Building societies practise far greater transparency in their conduct of business and provide the best option for ethical borrowers. And their average lending rates have been up to 0.5 per cent less than those of bank mortgages.

While the world of modern banking has a slick, uniform feel to it, that of many smaller building societies is still strongly individualistic. There are ethically oriented mutuals such as the Ecology Building Society, which specialises in lending on the purchase and restoration of old derelict buildings. The Norwich and Peterborough Building Society offers a "green mortgage" on homes which are built to specified minimum standards of energy conservation. The Catholic Building Society also deserves mention; it has a stated aim of helping those - particularly single mothers - who cannot otherwise obtain a mortgage.

Some societies, notably Bradford & Bingley, are now so large that they have started buying non-mutual businesses which are wholly owned by their mutual "cores". B&B has invested into areas linked to mortgage lending such as chains of estate agents.

How you pay off a loan can also also create dilemmas for the ethically minded. Rob Harrison, editor of Ethical Consumer magazine, argues: "The morally cleanest solution is to take a repayment mortgage where you repay both interest and capital with a mutual lender." Taking this route, you will then only have to purchase life insurance to cover the amount owed on the mortgage. "Buy from a mutual," observes Mr Harrison, "and you will know where your money is going to end up."

If you opt for an interest-only loan, you will need to start a savings plan to pay it off at some future date. Ethical fund providers now offer a comprehensive product range which can be used for this purpose. For instance, Friends Provident offers three versions of their Stewardship fund; one is a PEPable unit trust, one a unit-linked endowment and one a personal pension fund. NPI's Global Care fund is also available in these packages. Friends Provident is confident that the Stewardship fund can be used to back a mort- gage; over 10 years, it has grown faster than their "with profits" fund.

`The Independent' is offering a free 36-page Guide to Flexible Mortgages, with tips on home loans, including how much you can borrow, how to repay, and useful telephone numbers. For your copy, sponsored by First Active, call 0800 550551