Housebuyers poised to kick the CAT

The Government's new mortgage standard may be a let-down, but flexible loans are coming of age

With the onset of spring, our thoughts traditionally turn to moving home. But this year, with house prices at unaffordable levels for the majority of first-time buyers, the situation is a little different. As the Bank of England seems intent on putting up interest rates every couple of months at least, buying a home has become a lot less attractive.

Yet there has been a flurry of activity among mortgage lenders during the past week, with the majority announcing their intention to bring a new product on to the market.

This activity has been promoted by the Treasury's clarification of the charges, access and terms that are required to enable mortgages to qualify for the new CAT standard (see the box on the right).

Inevitably, mortgage pro-viders are falling over themselves to offer a CAT-standard mortgage. The race is on to be first, with a number of lenders planning to launch their own CAT-marked product in the next few weeks.

HSBC claims it will be the first big lender to introduce a CAT standard mortgage, which will be available to customers from 1 July. The Woolwich and Abbey National promise their versions "within the next few weeks". Virgin One argues that its existing Virgin One account would meet the standards outlined by the Treasury if it wasn't for the £50,000 lower borrowing limit (CAT-marked mortgages require a £10,000 minimum).

On the whole, lenders have welcomed the Treasury's proposals. The Council of Mortgage Lenders, whose mem- bers account for around 98 per cent of the UK lending market, approves of the Treasury's decision not to make CAT standards "so prescriptive that some types of mortgages were automatically excluded".

Initially, the Treasury decided to exclude discount and cashback mortgages from CAT standards, covering only variable-rate mortgages. But after lobbying from the home-loan industry, discount and cashback mortgages are now included in the scheme.

Even so, CAT loans have a number of shortcomings.

First, they are not compulsory. Despite the opportunity to introduce comprehensive regulation of mortgage lenders, advisers and brokers, the Treasury opted instead for a voluntary benchmark.

Second, they won't constitute attractive loans for home buyers as there will be no pressure to offer low rates. Most lenders will provide some form of CAT-marked mortgage, but they don't have to.

So other loans - with arrangement fees, for example - are likely to be much more competitive in terms of the interest charged. The CAT mark is fine as far as it goes. But the problem is that it does not go far enough.

The Treasury has missed a big opportunity to shake up the mortgage industry. The idea of a benchmark is a good one, but it focuses entirely on lenders, putting the onus on them to provide a product - if they want - which answers the criteria set out by the Treasury.

Everyone else - brokers, independent financial advisers (IFAs) or estate agency mortgage advisers - has been overlooked.

Many lenders have been disappointed by the Treasury's decision to disallow brokers from charging a separately negotiated fee for advice under the terms of CAT standards.

Brokers and IFAs are not charities and, as such, do not offer free services. If they cannot charge for their advice when they recommend a CAT mortgage, there is no incentive to promote them to borrowers, so they are not likely to suggest them.

Flexible mortgage specialist First Active estimates that more than half of all mortgage business comes through brokers, so if all of these avoid CAT mortgages because it doesn't pay to recommend them, they will be a failure.

"By not allowing fees to brokers, market penetration of CAT-standard mortgages will be substantially reduced," says Tony Ward, managing director of First Active.

"This in turn will drive down standards within the marketplace and lessen the effectiveness of what is otherwise an excellent initiative."

If the Treasury had made allowance for a clearly defined fee within the CAT mark, however, this problem could have been avoided, while still keeping the product straightforward.

There is also a danger that CAT mortgages may confuse borrowers if they are misled into thinking that the benchmark is some sort of government recommendation.

A CAT mortgage is not recommended by the government; it merely adheres to a number of set criteria. It does not mean it is the most competitive deal on the market or in fact the best mortgage for a home buyer.

You will almost certainly get a better deal if you opt for a non-CAT marked product, although CAT marks will make it easier to compare mortgage products.

As the benefits of CAT mortgages seem to be limited, with most products suitable only for a certain type of customer, what is the best deal for someone thinking of buying a home? It is worth taking a look at some of the small local building societies, which tend to offer the best deals (see the table on the left). Although First Direct and HSBC have both managed to slip into the top 10, it is interesting to note that the best- value mortgages are still those offered by mutual societies.