Lenders use loan deals to inflate profits

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Some of Britain's biggest mortgage lenders are boosting their financial returns by spreading out the cost of special incentives given to borrowers over several years.

By amortising mortgage discounts, cash-backs and other special deals paid to customers, building societies and some banks can announce profits that are tens of millions of pounds higher than their rivals.

Among lenders which amortise are Nationwide, Woolwich and Northern Rock building societies, together with Abbey National, which added pounds 60m to its half-year results by spreading the effect of its incentives.

Those who prefer to be more conservative and take the hit of special deals in the first year include Bradford & Bingley, Britannia, Yorkshire and Barclays Bank. Last week, Halifax Building Society said its half-year profits were pounds 64m down on what they might have been had discounts been amortised.

The practice has drawn criticism from Geoffrey Fitchew, chairman of the Building Societies Commission, the industry's regulator.

Speaking at the BSA conference in May, Mr Fitchew said: "The risk [is] that over time financial comparisons between different mortgage lenders will become opaque, where they follow different accounting conventions on material items in the financial statements.

"The amortisation method in effect provides a more favourable impact on capital for what is economically the same transaction. We are considering whether this is creating an unfair disadvantage for lenders who take the hit up front."

However, lenders that amortise their deals claim the practice represents the effect of the incentives as they actually happen each year.

Robert Jeens, the newly appointed group finance director at Woolwich Building Society, said that in the first half of this year, when it declared pounds 183m in profits, some pounds 45m of incentives paid to borrowers was amortised.

He said: "Our approach is to look at the whole locked-in returns over the several years in which we offer incentives." This was done by imposing redemption penalties, which forced clients to return the incentives they had received if they repaid a mortgage early.

Andy Kuipers, assistant general manager at Northern Rock, said the problems of borrowers defaulting and lenders losing out in the event of a house price collapse on a similar scale as the early 1990s were minimal.

Many of the big incentives, such as cash-back deals, were available only to borrowers able to advance deposits of between 5 and 10 per cent.

Mark Pain, group financial controller at Abbey National, added that another reason why not all lenders amortised was because they might not have in place the complicated systems needed to do so.

However, a spokeswoman for Britannia said: "We write off any of our special discounts in year one, irrespective of how long they run for, because we don't feel it is appropriate to spread costs. Lenders who do this are relying on people keeping their mortgages with them, which is not guaranteed."

Yorkshire Building Society said it too behaved "prudently" and did not amortise, preferring to take a hit immediately, even though it estimated the effect was to reduce by pounds 13m the pounds 40m profits it expects to make in 1996.