Mix-up over payments into Peps: Maria Scott explains how a novel home loan scheme went off course

FIRST Mortgage Securities was one of the first lenders to offer mortgages backed by personal equity plans but, as the company and some of its borrowers have discovered, there can be a cost involved in breaking new ground.

First Mortgage is to compensate people with loans backed by Foreign & Colonial personal equity plans for a mix-up that resulted in six months' PEP contributions going uncollected.

Mark Chilton, marketing director at First Mortgage, said four or five borrowers were involved and the compensation would probably be pounds 70 or pounds 80 each. This will make up for investment profits that would have accrued on the monthly PEP contributions if they had been collected.

First Mortgage Securities launched a range of schemes with loans backed by PEPs and investment trust savings schemes three years ago. They offered an alternative to endowment loans for people who liked the idea of building up an investment fund to repay their loans.

An attraction of the First Mortgage plans was their simplicity. The lender would collect one payment a month and divide it into payments for interest and investment. The investment element would be passed on to the investment manager.

However, this relied on First Mortgage having a system that could do this. In common with many of the newer mortgage lenders, the company contracts out the administration of loans to specialist mortgage administrators. Handling of the PEP loans was switched last year to a Barclays subsidiary, Intermortgage.

That company was unable to collect contributions for the PEPs in conjunction with interest payments for the loan. New arrangements had to be made and this resulted in the hiccup that led to missed contributions.

For Betty Edgar, a First Mortgage borrower, this was the last straw after, she claims, many administrative problems with her loan.

'This has caused me not only intense irritation but unnecessary expenditure of time and money in phone calls and correspondence,' she said.

Mr Chilton said Mrs Edgar's experience was exceptional. 'Occasionally, one case does fall down.'

He admitted, however, that First Mortgage had learnt a lesson from its experiences with PEP mortgages.

'There is a grave danger of making things too complicated,' he said. 'The product was innovative. It was difficult to set up.'

First Mortgage is not taking on new mortgage business at present, although it plans to come back into the market in October.

Mr Chilton said the company would probably offer simple products. 'The mortgage business has got too complicated,' he said.

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