Lenders have historically attracted borrowers by tempting them with discounted, capped and fixed-rate mortgages with low headline rates. But there is a price to pay, and home owners may not realise they will be stuck on standard rates for several years, or have to pay several thousand pounds if they try to swap to a new mortgage.
Now lenders are falling over themselves to be fair and proclaim the transparency of their deals. But for most existing borrowers the pressure on lenders came too late.
This is a subject close to my heart. I took a four-year, fixed-rate mortgage with Bristol & West two years ago. When I requested a larger loan to move to a bigger property I was refused point blank because by then I was earning half my income on a self-employed basis. Despite the fact that I was making an excellent, regular income, B&W has rigid lending criteria so none of this money would be taken account of by B&W until I had three years' of audited accounts. End of discussion. I have since met other people who have suffered the same way under B&W's old-fashioned lending rules.
I had to move house, and switching lender cost me nearly pounds 3,000 in penalties. This is all too common, says Diane Saunders, a financial adviser in Leeds. "I know a man who took a 24-year fixed mortgage with NatWest at 9.19 per cent last year. His marriage broke up and now he must scrap the mortgage and pay nearly pounds 9,000 in penalties."
Neither of us were forced into taking our respective mortgages. We were warned of the potential penalties if we changed the terms of our loan. "Lenders send out the terms and conditions but to most people it is just gobbledygook and figures. If the headline rate seems good then they just go for it, but that can be a mistake," says Ms Saunders. She says many borrowers do not understand the implication of being tied into the standard variable rate when the fixed, discounted or capped term has ended.
"Mortgage rates are low now but nobody knows what the variable rate will be in the future. I would be wary of choosing any mortgage that has penalties for switching after the initial term."
Northern Rock has a five-year lock-in as standard on most of its current fixed-rate deals. That is an improvement on the old rates - some deals available as recently as June had a seven-year lock in.
"Northern Rock is dreadful," says Ms Saunders. "It plays on people's worst instincts by attracting them with cheap mortgages. People must look at the entire package and not just the headline interest rate." Yet low headline rates mean Northern Rock regularly tops the mortgage best buy tables.
Ray Boulger, technical manager with John Charcol, independent financial advisers, points a finger in the same direction. "Northern Rock are the past masters of low initial rates with steep redemption penalties." He names Alliance & Leicester as another lender with punishing lock-ins.
However, he is not wholly against the principle of lock-ins. "They can work for some people, particularly cashback mortgages that provide a lump sum. These can be useful for first-time buyers and those remortgaging to cover costs. So banning them would reduce choice. However, legislation should insist penalties are made clearer. Most are hidden in the small print or disguised with weasel words."
Some lock-ins can be good value, says Mr Boulger. He cites those offered by Halifax and Nationwide. He also defends my lender, Bristol & West, which he says has a sufficiently large product range to offer customers attractive alternatives to lock-ins.
Ron Stout, spokesman for Northern Rock, says lock-ins are part of a wider range of products that offer customers a choice. "We offer mortgages without penalties, with penalties that don't overhang the term, and headline-rated mortgages with an overhang period. Many customers want the biggest savings up front."
He says its customers are aware of the implication of the lock-in. "Customers would not be committing themselves to a mortgage without conditions being spelled out on the mortgage offer. Some may not appreciate the significance but you are always going to get that."
Brian Murphy, the Building Societies Ombudsman, said in his report in June that early redemption penalties and lock-ins had led to a large number of complaints. But if you are facing a hefty redemption penalty and hope the Ombudsman might see things your way, you could be disappointed, as he rejected complaints where he felt lenders had "fairly and clearly" set out the terms and conditions for penalties.
Even where borrowers had satisfied the Ombudsman that they had never signed the lender's Deed of Variation setting out penalties on its fixed rate mortgage, only partial compensation was given, because they had enjoyed the benefits of the fixed rate for some time.
So if, like me, you are facing a hefty penalty, nobody is likely to come flying to your aid. Once you have signed, you are on your own. Recent reports have suggested that extended lock-ins and heavy redemption penalties are likely to be scrapped, but don't hold your breath.
However, HSBC has come out and said it is scrapping overhanging redemption penalties on existing deals. Abbey National has scrapped tie-ins, but not for existing customers (see box, left).
Some mortgage industry experts suggest that if you can serve your time it is worth getting a mortgage with an extended tie-in. By the time your fixed or discounted period is over, we are all likely to be on standard rates tied closely to bank variable rates. This is possible, and it may be worth a gamble if you are taking out a mortgage now and think that rates will remain low for several years.
STUCK IN AN UNWANTED DEAL
Steve and Rebecca Lambert (right), from Essex, are angry with Abbey National. They feel the bank has been less than open with them over the redemption penalties on their fixed rate loan. Mr Lambert, who owns an electrical distribution company, read in the Independent on Sunday last year that Abbey had decided to ban overhanging redemption penalties on fixed-rate loans. Their two-year, fixed-rate deal at 5.99 per cent ends this month, so the couple expected to be able to move to a new one. The literature they have from Abbey only suggests penalties "may apply" on the loan until 2002.
Instead they have been told the "no overhang" deal only applies to those who are taking out new mortgages. As existing customers, the Lamberts must stay on standard rates for three years or face a penalty of pounds 3,200.
Mr Lambert says: "We did understand it was a two-year deal when we took it out and we are fully aware of it. But no way was I aware of the three years afterwards. We have been offered a further fixed rate of 5.99 per cent for two years but we have to pay a penalty. There was no negotiation - we can take it or leave it." The only concession was that the Lamberts can add the penalty to a new fixed-rate loan if they wish. Mr Lambert says he won't bother with the new fixed-rate deal: "Abbey will have my account for the next three years but I will be off after that."