Clampdown on hidden costs in mortgages

MORTGAGE LENDERS are poised to announce a clamp-down on the controversial practice of offering glittering upfront mortgage deals which gloss over the sting of redemption penalties.

The Council of Mortgage Lenders, which represents all mortgage lenders, including banks, is preparing a big change to the Code of Mortgage Lending in an attempt to tighten rules to prevent customers being hoodwinked.

The clampdown follows an angry debate over the practice of offering very low interest rates in order to tempt customers into buying fixed and discounted mortgages.

Lenders take a loss when they lure borrowers with a very low rate. But there is mounting concern that they fail to explain the sting in the tail: The borrower is bound in to a much less beneficial rate a few years later.

The "bargain" rates, especially on some five-year fixed-rate deals, also carry heavy redemption penalties which force the customer to stick with that lender, even when the rate is no longer fixed. The redemption penalties often amount to thousands of pounds.

John Heaps, chief executive of Britannia Building Society, said: "We are looking at rules about how clear lenders make the point that there is a trade-off. It's not clear that [borrowers] always understand that."

Lenders are required to publish details of redemption penalties in the small print of mortgage contracts, but there is no explicit rule ensuring borrowers understand the link.

Earlier this year, the Building Societies Association began pressing for redemption penalties to be abolished altogether if they extended beyond the period when a mortgage rate is fixed. Lenders backed away after mortgage brokers claimed scrapping the penalties would reduce customer choice.

The code will require lenders to ensure that customers understand the trade-off.