Help it may be better to avoid

New measures intended to benefit those taking out mortgages may not produce the results the Government hoped for
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The Independent Online

Anybody with an instinctive mistrust of mortgage lenders will have immediate sympathy with the latest attempt to protect borrowers from excessive charges and hidden penalties. Sadly, some of this sympathy may be misplaced.

Anybody with an instinctive mistrust of mortgage lenders will have immediate sympathy with the latest attempt to protect borrowers from excessive charges and hidden penalties. Sadly, some of this sympathy may be misplaced.

In April the new government CAT standard for mortgages came into force (see box for details). CAT sets out voluntary benchmark terms for Charges, Access and Terms, and can apply to variable, fixed-rate, discounted and capped mortgages.

The aim is to prevent borrowers falling for some of the catches that banks and building societies insert in the small print. These include imposing redemption penalties on fixed or discounted mortgages that stretch well beyond the term of the special deal, stinging borrowers with a range of administration charges, and making purchase of the lender's household insurance compulsory.

But while the aims may be laudable, many experts fear they may only add another layer of complexity to an already confusing mortgage market.

Worse, borrowers may be misled into thinking CAT mortgages automatically offer the best deal, when better rates will tend to be outside the scheme.

A number of lenders have been quick off the mark to offer a CAT-compliant product. Rather than converting all their mortgages to the new scheme, lenders are adding a CAT mortgage to their existing range.

Yorkshire Building Society has launched a CAT-standard variable-rate mortgage which allows borrowers to make overpayments and underpayments, has no redemption charges and no upfront arrangement fee.

In one respect it beats the CAT benchmark. The Government has said qualifying mortgages must charge no more than 2 per cent above Bank of England base rate - a surprisingly high figure. Yorkshire's CAT mortgage will stay within 1 per cent above base.

Direct Line has a variable-rate CAT mortgage charging 7.18 per cent, while Cheltenham & Gloucester Flexible Mortgage meets the standard with a variable rate of 7.88 per cent.

Not every lender has been so speedy. Halifax is aiming for a June launch for its CAT mortgage, Bradford & Bingley hopes to offer one by the summer, while Alliance & Leicester will say only that it is "committed to the principle and will be introducing one at some time".

The Government is likely to make great claims for CAT standards, but Ray Boulger, technical manager for mortgage specialists John Charcol, is not impressed. He believes the mortgages that have been launched are "inferior" to other products offered by the same lenders, or available elsewhere. "Cheltenham & Gloucester is charging 0.14 per cent higher on its CAT mortgage than its standard variable rate. Yet it offers most borrowers nothing new."

It is a similar picture with Yorkshire, he claims.

Direct Line offers a non-CAT mortgage offering borrowers a discount of 2.19 per cent for six months, reducing its rate to 4.99 per cent, with smaller discounts thereafter. This includes a redemption penalty - an anathema to the new scheme - so it fails the CAT test.

"This is a superior scheme and makes the lender's CAT mortgage an irrelevance - they have simply introduced a worse product and made it compliant," says Mr Boulger.

He suggests that the Government has underestimated the ability of lenders to wriggle round any regulatory system.

The only lender he believes is offering a better deal under the new scheme is Egg, with its variable-rate mortgage at 6.69 per cent, guaranteed to rise no more than 1 per cent above base. It also offers two competitive five-year fixed-rate mortgages.

He says only one category of borrower will automatically benefit from the new scheme - those wanting a mortgage of between £10,000 and £25,000. To qualify for CAT status, lenders must make products available to those borrowing small amounts.

Although most mortgage lenders have expressed support for the scheme's principles in public, many have reservations.

Halifax spokesperson Celia Rowland admits that CAT rates are unlikely to be the most competitive. "An awful lot of people are led by rates when choosing their mortgage, so CAT mortgages will not appeal to them."

She says the new type of mortgage may appeal most to first-time buyers, who will be attracted to clean deals that are easy to understand and come with no extra fees.

Patrick Bunton, of mortgage advisers London & Country, says CAT standards are already causing confusion. He recently spent 15 minutes trying to convince a customer that a CAT mortgage was not the best deal. "It would have seen him paying an extra 0.75 per cent for an inferior product, but he took a lot of convincing that this was a bad move."

The full implications of CAT standards will only be seen as more lenders bring products to market. One reason for the foot dragging is the stipulation that complying mortgages must calculate interest on a daily basis - many major lenders recalculate interest annually.

The daily calculation is better for borrowers with repayment mortgages, because any capital repaid immediately reduces interest owed on the loan. With an annual calculation, interest payments will be reduced only after 12 months.

The Government deserves sympathy in regard to some of the criticisms being levelled at its attempt to help borrowers. Some complaints have a personal charge - particularly from mortgage brokers, because the new scheme bans them from charging fees for arranging a CAT mortgage.

The stipulation that qualifying mortgages must be made available to lenders' existing customers was an honourable move, designed to open CAT benefits to as many as possible, but it looks to have backfired. Lenders would lose billions if all their borrowers had access to their most competitive rates - which means they will not cut their own throats by offering CAT mortgages at bottom-of-the-range prices.

The Government also underestimated lenders' ability to maximise PR mileage from the new scheme, while offering borrowers minimum return. The road to further mortgage confusion has been paved with good intentions, although not always from the lenders.

Further details on CAT mortgages can be obtained via the Financial Services Authority leaflet line on 0800 917 3311 or its website at www.fsa.gov.uk.

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