So will the CAT have claws?

The Government wants to clean up the mortgage industry. Its proposals may not be enough.
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The mortgage landscape is changing. Think mortgages now, and you think hidden charges and redemption penalties, misleading interest rate offers, and having to buy expensive insurance. Think mortgages in the future, and you can think "honesty, transparency, clarity and fairness".

The mortgage landscape is changing. Think mortgages now, and you think hidden charges and redemption penalties, misleading interest rate offers, and having to buy expensive insurance. Think mortgages in the future, and you can think "honesty, transparency, clarity and fairness".

Or at least, that's the plan. This week the Government unveiled its new CAT standards for mortgages - the rules on "Charges, Access and Terms" that lenders must follow if they want their products to get an official stamp of approval. And it also promised tough new laws to ensure clear and comparable information will be available to borrowers so that they can weigh up the merits of rival mortgages before making a decision.

Pressure to sort out the mortgage mess has been growing for a number of years. As remortgaging - moving to a new lender with a better deal - has grown in popularity, millions of homeowners have been outraged to find they face huge hidden penalties for redeeming their existing loan. And as the bonuses from endowment policies fall, more and more people are finding themselves having to top up premiums in order to pay off endowment mortgages. Mortgage brokers and lenders ceratinly need their act cleaning up.

Of course, there is no animal so scrupulously clean as the CAT. The table opposite shows the minimum standards a mortgage must meet to get the Government's okay. The overarching rule is transparency: lenders must come clean on charges.

The Government expects that simplicity of CAT-standard mortgages will make them particularly attractive for first-time buyers: rather than having to wade through bamboozling information on the UK's 5,000 mortgages of varying complexity, they will be able to head straight for the straightforward.

However, the rules set out this week do not add up to a guarantee that a CAT-standard mortgage will be the most suitable for all borrowers. Indeed, lenders are determined that CAT-standard mortgages will be only one of a large number of products on sale. This will certainly be the case, at least initially, because discounted and cash-back mortgages will not meet CAT standards, so excluding most of the current best buys.

Bob Bennett, finance director at the mortgage bank Northern Rock, warned against assuming that CAT- standard mortgages will be right for everyone. "New borrowers and people who have spent 20 years in their house are not going to need the same mortgage," he said. "The first- time buyer is always going to want help with consumables, so they will want cash back, or a lower interest rate for the first few years."

Mr Bennett is concerned that the Government may be encouraging borrowers to see CAT-standard mortgages as the "best" products on the market, as this could come back to haunt borrowers in years to come. Endowment mortgages were seen as the natural first choice mortgage in the 1980s - though few people realised that they may not be able to pay off their debts when the endowment policy matured.

There are more specific reasons to be wary of the CAT-standard mortgage. For instance, the limit of 2 per cent above base rate for a CAT- standard variable-rate mortgage is actually higher than the current industry average now, and is therefore likely to do nothing to improve rates for the borrower.

And the daily calculation of interest - which means borrowers immediately get the benefit of any overpayments they make - is also accompanied by daily capitalisation. This means the interest is added on to the outstanding debt every day, so that borrowers will be paying interest on the new interest, day after day.

Tony Ward, managing director of flexible mortgage specialists First Active, says this could make CAT- standard mortgages a worse deal than ones which calculate interest monthly. He also criticised the fact that lenders were not bound to keep to CAT standards for more than six months of a mortgage.

"These measures do not go nearly far enough. Voluntary CAT standards that lenders can opt out of, giving just six months' notice, will enable unscrupulous lenders to lure borrowers into a false sense of security, only to be duped when the CAT-standard term ends," he said.

The Government insists that lenders will be extremely unlikely to renege on CAT standards during the life of the mortgage, but people would in any case have six months to remortgage or complain to the ombudsman. However, the Government might tweak its plans between now and their introduction in April: it said this week that it was launching another round of consultation.

The arrival of CAT standards is just the first step in a year of reforms that will transform the way mortgages are sold in the UK. The Financial Services Authority will police new rules for mortgage lenders, but surprisingly has not been given the power to take direct action against brokers. It will also not be setting rules to guarantee the quality of advice given to borrowers.

Consumer groups warn the Government may have missed an opportunity to stamp out the dodgy mortgage dealers, whose advice is inadequate or corrupted by the lure of fat commissions on particular products. Two-thirds of homebuyers currently seek professional advice before deciding on their mortgage, but the new regime is designed instead to reduce the number of people who need advice, which should be confined to people with unusual circumstances.

There will be more standardised information, including the amount of commission that brokers get when they sell a particular product, which will let borrowers compare and judge mortgages - and the motives of their brokers - for themselves.

The new system will mean that, by law, lenders must ensure:

clear information in a standard form, so that it will be easy to compare different mortgages

honest interest rate quotes, with the APR calculated in the same way by all lenders

all charges in the open, so you know upfront what you will pay to move your mortgage or get out of your mortgage early.

The Consumers Association's Neil Walkling is sceptical. Investment advice is regulated by the Financial Services Authority, he said, and it would be logical to include the regulation of mortgage advice in its remit.

"All these measures do not remove the need for many prospective mortgage borrowers to have high quality and unbiased advice. The mortgage market will still be a very complicated market, especially for first time buyers. People will still want advice on what product is most appropriate for them, and they will still be vulnerable for that reason."

Nonetheless, the Consumers Association does applaud the direction the Government has been moving in. Anything that increases the amount of information available to customers is welcome, it said.

The plans will lead to a "new era of transparency" in UK lending, according to Jayne-Anne Gadhia, managing director of Virgin One, Richard Branson's mortgage company. "They will leave no hiding places for poor products or poor lenders. We particularly welcome the proposal to remove the sanctuary of the small print. Too many lenders entice borrowers wth headline grabbing rates and smooth words and then fleece them with well-hidden caveats."

Launching the new regime last week, Melanie Johnson, the economic secretary to the Treasury, said first time buyers will know where to start and all borrowers will be "empowered" to make the right mortgage choice.

"Once and for all we're tackling the confusion that can surround mortgages: the interest rates that can't be compared, the charges that aren't explained, and the hidden penalties that only emerge later. Or even worse, the redemption charges that only emerge when borrowers want to remortgage or move house. What you see is what you get."

Well, not quite from now on. It is going to take more than a year for regulators to develop and start enforcing a full set of rules for standardising information given to borrowers, but the industry is likely to make its own progress before then. Lenders have every incentive: they will need to give clear information at least with their CAT standard products and customers are certain to start heading for the most demonstrably trustworthy firms.

And there will be such a thing as a demonstrably trustworthy mortgage lender, now that their products can be compared against the Government's minimum standards. The CAT ensures that borrowers can get to the cream.

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