Money & ethics: So you want to buy your home with a clear conscience?

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The Independent Online
In the latest of his series Iain Morse offers tips for the ethically minded on how to evaluate mortgages on offer: who deals with whom and what risks your principles expose you to

Arranging one's finances in the most ethical way possible is not just about investment. It extends to many other areas, including borrowing a mortgage. Yet ethically-minded investors face some tricky choices when it comes to finding the right loan.

At the very least, an understanding about lenders and their policies will come in useful, according to Amanda Davidson, a partner in Holden Meehan, a firm of London-based independent financial advisers. She says: "A degree of pragmatism helps, depending on where you borrow and which means of repayment you choose."

In the UK there are two important types of lender for domestic mortgages: banks and building societies. The key difference from an ethical investor's point of view is that while most banks lend to governments and companies of all sizes, mutual building societies do not.

Precisely because of their mutual status, building societies must restrict their core business to deposit taking from and lending to individual members of the public. This means that they are free of involvement in areas of business which many ethical investors would regard as unacceptable.

The "big four" clearing banks: Barclays, Lloyds/TSB, Midland and NatWest, are sometimes accused of involvement in the provision of third world debt. Moreover, investors who object to the arms industry argue that any bank buying UK gilts is to some extent funding government expenditure on weapons through the Ministry of Defence.

Behind this lies a larger issue about banking confidentiality; the principal ethical question to ask of a bank is who they lend money to. Few are prepared to answer this question. Confidentiality is crucial to the success of banking operations. So selecting a bank by areas of business it avoids is virtually impossible.

A third category of mortgage providers, so-called "direct lenders", account for a small but growing sector of the market. Borrowing a mortgage "book" on the international money market, then reselling it to individual borrowers, they fail the same ethical test as applied to clearing banks.

There are exceptions to this rule; both the Co-operative Bank and the much smaller Triados Bank can fairly claim to follow ethical principles in their banking policies. Unfortunately, neither currently offers domestic mortgages as part of their product ranges.

Among the larger clearing banks, Abbey National does not lend direct to companies. About 40 per cent of Abbey's pounds 151bn assets, of which two- thirds are UK-based, is in mortgages. The Abbey is also committed to taking "proper regard to the environment". But Abbey National does buy UK gilts and securities issued by other UK banks with high credit ratings - a list likely to include some of the "big four" already mentioned.

If this sounds negative, Ms Davidson warns against despair: "Despite the conversion of some large building societies to bank status, those remaining still offer a wide enough choice of mortgage options to compete with the bank sector." Moreover, going to a building society is often cheaper. At present, the average lending rate charged by building societies is 8.34 per cent, against the banks' 8.7 per cent.

Ethically orientated mutuals include the Ecology Building Society, which lends nationally on the purchase and restoration of old buildings, and the Catholic Building Society which has a stated policy of helping those who cannot easily find a mortgage. Meanwhile, Norwich and Peterborough Building Society has just launched a "green mortgage" available only for the purchase of homes that meet stringent criteria on energy conservation. The society completed its first "green loan" this week.

Separate from finding a loan, the way of paying it off can also create difficulties for the ethically-minded. Rob Harrison, editor of The Ethical Consumer magazine, argues: "The morally cleanest solution is to take a repayment mortgage, where monthly payments include interest and capital, with a mutual lender."

Choosing this option means that you will only have to purchase life insurance to cover the amount owed on the mortgage. "Look for the cheapest cover from a mutual insurer, or friendly society," advises Ms Davidson, "that way you know where your money is going."

But for those who still want an interest-only loan, where an investment is built up to help pay off the capital after a given period, providers of ethical funds offer a variety of options: PEPs, so-called "unitised" endowments and even personal pensions, all of which can be used to pay off an interest-only mortgage.

Ms Davidson advises caution to ethical investors tempted by this method of repayment: "It's a matter of carefully weighing the pros and cons in terms of your particular circumstances."

Traditional with-profits endowments do not offer negative or positive screening on the underlying investments they hold, but do offer a low- risk means of paying off your mortgage loan. Typically, these funds hold a portfolio of investments including gilts, commercial property and shares in large, blue-chip companies which may, or may not be, ethical in their own business dealings.

"Ethical funds by contrast tend to be more volatile in the short to medium term because they are invested into a narrower range of company shares, usually with a higher proportion of those in smaller companies," Ms Davidson suggests. None have significant holdings in property and most avoid gilts. This makes using them to pay off a mortgage riskier than using a with- profits fund.

The performance of ethical funds can also show significant variation. Clerical Medical's "Evergreen" fund, available in a PEP or unitised endowment, shows five-year growth of just 29.6 per cent. John Allen, chief fund manager at Clerical Medical, concedes: "It's not ideal for use as part of a mortgage, because it's too volatile."

Friends Provident is more confident that its Stewardship Fund can be used to back an interest-only mortgage, with 10-year growth on a unit- linked endowment averaging 9.52 per cent growth a year over that period. The company's with-profits fund has returned 8.11 per cent average growth over the same period.

The `Independent' has produced a free 28-page `Guide to Ethical Finances' by Nic Cicutti, the paper's personal finance editor. The guide, sponsored by Friends Provident, has information on all aspects of money and ethics, including loans and how to pay them off. Call 0800 214487 for a copy or fill in the coupon on page 4.

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