Brussels to investigate mortgage APR figures

THE EUROPEAN Commission is to investigate the way the cost of mortgages is expressed to borrowers. Lenders suspect this could eventually force them to include the cost of compulsory insurance, writes Maria Scott.

An increasing number of mortgages are sold with tied-in endowment policies, household or redundancy protection insurance. Including these in mortgage interest calculations would show these deals in an unflattering light.

It is a move that would be welcomed by the consumer lobby and by the insurer Direct Line, which recently launched a campaign against the way building societies sell insurance with mortgages.

Jean Eaglesham, head of the money group at the Consumers' Association, said interest rates on mortgages would rise by between 1 and 3 per cent if insurance premiums were taken into account.

The Commission intends to look at how annual percentage rate calculations are used to express the cost of mortgages. APR figures aim to show the total cost of borrowing, adding extra charges to the nominal rate and taking into account the effect of compounding.

At the end of last year the Commission implemented its second directive on consumer credit, which introduced rules on the way lenders calculate APRs on consumer loans.

This requires compulsory insurance to be included, but does not apply to mortgages.

The Council of Mortgage Lenders has already told the commission it opposes a separate directive on mortgages.

Meanwhile, the British Government has delayed implementing the second directive on consumer credit, arguing that elements of the rules are misleading. But by the end of 1995 it will be compulsory for all member states.