... but they could have bad news for borrowers

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The Independent Online
THE BUILDING societies meet today to discuss a plan to take all cheap up-front mortgage deals with built-in redemption penalties off the market. Existing deals would not be affected, but all new offers with cashbacks and discounts on standard variable mortgage rates could be abolished, leaving new borrowers with a much more limited choice of standard variable rates or fixed-rate mortgages.

The suggestion is part of a discussion document produced by Adrian Coles, director-general of the Building Societies Association. It will only lead to a change if it is also approved by banks and other mortgage lenders in the Council of Mortgage Lenders, who will hold a similar discussion next month.

The possible change has been attacked by critics who fear it is a step back to the days when mortgage lenders operated a cartel. Philip Cartwright, of mortgage brokers Chase de Vere, also claims the move would restrict consumer choice.

But many lenders are now anxious to see special offers withdrawn on the grounds that they have become too generous to borrowers, and are no longer necessary to create new business now the housing market has recovered from the downturn in the early Nineties.

Some also fear a backlash of public opinion from millions of borrowers whose special deals have now ended and find themselves locked in to their new lender by heavy penalties for early redemption.

Cashback and discount mortgages were originally introduced in response to the depressed state of the mortgage market in an attempt to win extra business. At the height of their popularity borrowers could obtain a cashback of up to 6 per cent of their loan, or up to 6 per cent off their current mortgage interest rates spread over one, two or three years before reverting to the standard variable rate.

Discount deals proved extremely popular and accounted for more than half of new mortgages in 1995 and 1996. Special offers were not normally available to existing customers unless they actually moved home. But hundreds of thousands of home-owners went to the trouble and expense of re-mortgaging their homes with different lenders in order to take advantage of special deals.

Borrowers who accepted special deals are, however, routinely prevented from moving on again once the discounts have ended by clauses in the small print of their mortgage contracts. Penalties for early repayment are usually equal to the size of the cashback or six months extra interest.

Clive Miers, a Leeds-based mortgage broker, has led a lone campaign arguing that redemption penalties are unenforceable in law, but none of the handful of court actions has yet succeeded. Meanwhile, an estimated 3 million borrowers who have taken out cashback and discount mortgages over the past few years are now suffering a "payment shock" as their special deals come to an end.

Their monthly payments are routinely reverting to the standard variable rate, at a time when variable mortgage rates have risen and are likely to rise again shortly. Abbey National yesterday raised its SVR to 8.95 per cent as a result of the latest increase in base rates. Other lenders are expected to follow.

Lenders were also alarmed at the backlash against the Northern Rock when it unilaterally reduced interest rates on savings accounts, prompting the Office of Fair Trading to launch an investigation into unfair treatment of investors. Many now fear a similar backlash against redemption penalties

If lenders do decide to withdraw cashback and discount deals in future it is most unlikely that existing borrowers will be released from their commitment to pay redemption penalties. Borrowers will still be offered a choice between variable rate and fixed rate mortgages.

Fixed rate mortgages have accounted for roughly half of all new loans in the past year, overtaking discount and cash-back loans in popularity. They also routinely contain lock-in clauses which oblige borrowers to revert to the standard variable rate for up to two years once the fixed rate expires.

Lock-ins would be abolished on future fixed rate offers.