Lenders to justify their loan offers

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Mortgage lenders are to introduce a code of practice that includes a requirement to send letters to potential borrowers explaining why the deal they are being offered is most suitable for them .

The "reason why'' letter will form part of a drive by the Council of Mortgage Lenders, the industry trade body, to educate customers about the loans they take out. The code of practice is being seen within the mortgage industry as a pre-emptive strike against the threat of statutory regulation.

The CML hopes to see its code added to the Banking Code of Practice, with all lenders being encouraged to subscribe to that part of it, irrespective of whether they offer banking services.

Michael Coogan, head of legal services at the CML, said: "The important thing is that borrowers have a complete understanding of the agreements they enter into. That includes the nature of important conditions to a mortgage, including how long it may be fixed for and at what rate, whether there is a redemption penalty and what other services may be attached, such as home or contents insurance.''

A key issue is whether brokers will agree to be bound by the new code, to be launched in June. About half of mortgages are taken out through intermediaries and the CML admits there could be difficulties because of the wide range of products and the increasing use of telephone-based mortgage services. But the CML is hoping intermediaries will accept the voluntary code.

So far brokers' reaction has been mixed. Ian Darby, a director at John Charcol, said: "My feeling is that it was about time that something like this came about. People need to feel confident that they understand what they are borrowing and what it means to them."

However, Phillip Cartwright, senior manager at London & County, another large broker, said: "The problem is that there are 4,000 mortgage products on the market. How can you tell someone that a two-year fixed loan is better than a three-year fix when you don't have a crystal ball and don't know if interest rates might change several years ahead?"

Lenders' problems in the past included loans for unsafe home income schemes, investments that have left borrowers worse off. Mike O'Brien, Labour MP for North Warwickshire, who has campaigned on behalf of home income victims, said: "On the face of it, a code of practice is a good idea. People need protection and lenders need to know that the end user of a loan is being safeguarded. If this works, all well and good. If it does not then Parliament might have to consider other ways of giving that protection."

The code of practice initiative comes amid evidence of a continuing downturn in the market. This week, Halifax Building Society reported a further 0.2 per cent fall in house prices in March. Lenders' reaction was to try to kick-start the market by offering special deals.

Abbey National has brought back 100 per cent mortgages for its own borrowers or those transferring from another lender. First time buyers are excluded. The 100 per cent is linked to the valuation or purchase price, whichever is lower. The bank deducts a fee, similar to a mortgage indemnity guarantee, from the loan. For a £60,000 mortgage at 100 per cent, a fee of £1,500 is deducted, leaving buyers to make up the difference.

Royal Bank of Scotland (in Scotland only) and National & Provincial and Yorkshire Building Society also offer 100 per cent loans, although this usually applies just to existing borrowers. In some cases an extra 0.5 per cent interest is added.

TSB offers a 100 per cent mortgage for borrowers moving home and first- time buyers, fixed at 9.4 per cent for four years. The mortgage indemnity is added to the loan, allowing borrowers the full amount they are seeking. Free standard valuations of up to £300 are part of the package.

John Charcol has a 100 per cent loan available from Bradford & Bingley that includes a one-year discount to 4.83 per cent. Mortgage indemnity is added to the loan in this case too.

Midland Bank is discounting its variable rate to 3.99 per cent for 12 months for first-time buyers. Barclaycard is offering cashbacks of £100 on a Barclays mortgage, up to a maximum of £1,500, for each 300 points earned through its Profiles loyalty scheme.

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