Fast action to end rip-off mortgages

By Isabel Berwick, Personal Finance Editor

By Isabel Berwick, Personal Finance Editor

31 October 1999

The Government is to take swift action against banks and building societies in an attempt to protect homebuyers from biased salespeople and rip-off loans. Ministers will announce next month that all mortgage sales will come under the supervision of the new regulator, the Financial Services Authority (FSA).

The move will cause a massive shake-up in the industry, and could put an end to expensive endowment mortgages, which have been sold to millions of homebuyers by commission-driven sales advisers.

The current voluntary code of sales practice has repeatedly been abused: in one recent investigation, the Consumers' Association found many advisers gave "outdated, misleading and biased" advice.

The reforms are being driven by the Secretary of State for Trade and Industry, Stephen Byers, who is described by industry insiders as "obsessed" with cleaning up the mortgage market. Yesterday Mr Buyers responded angrily as newspaper reports revealed that more than 500,000 homeowners will have to pay an extra £50 a month to pay off their home loans.

The problem affects those with endowment mortgages. Borrowers who sign up to pay the monthly interest on their home loans and also pay into an investment plan - the endowment. After 25 years the endowment is supposed to generate enough money to pay off the original capital, plus an extra cash lump sum.

A £100-a-month endowment will typically trigger more than £1,000 for the person who sold it. And charges levied by the insurance firms are so high that it can take up to seven years for a 25-year endowment policy to be worth more than the homeowner has paid into it.

Mr Byers said: "We have real concerns about the way in which endowment policies have been sold.This is clearly bad practice and needs to stop."

Only half of working adults in Britain have made any payment into a pension and only 59 per cent have a savings account, according to a study by the Bradford and Bingley building society. The survey also found that men were much more likely to be in debt than women. The south-east is the UK's wealthiest region, with average household savings and investments totalling £5,753, compared to £2,121 in Scotland.