Mortgage Survey: Move off the high street

Richard Branson is probably the nation's favourite businessman. He's long been aware of his personal popularity, expanding his Virgin empire on the strength of it. But his move into mortgages last year could be his first big miscalculation.

Why? Because Virgin is just one of many new companies hoping to make a mint out of home loans. Despite the hype, Virgin's One Account, launched last October, has gained barely 1,000 customers, a fraction of the amount most lenders can rack up. Coventry Building Society, for instance, lent more than pounds 600m last year, almost 10 times as much as Virgin.

Other new mortgage lenders are as well known as Virgin - such as Direct Line and Legal & General. The new competition means anyone sticking to building societies or banks for their mortgage is missing out on potentially much better deals.

What is the spin these lenders have brought to the mortgage market? Flexibility for one. This has been embraced by the likes of Legal & General, Virgin Direct, Kleinwort Benson and Bank of Scotland Mortgage Direct. Each offers a slightly different deal, but the basic concept of allowing you to pay off the mortgage when you want to and to borrow against it when you need to, is common to all. In effect, they let you to run your mortgage as a current account.

According to Virgin, the fact that people keep savings and borrowings separate is costing them money. Analysts at Dresdner Kleinwort Benson claim that collectively we're losing pounds 2.1bn a year because a different rate of interest is charged to borrowers than is paid out to savers. In effect, banks and building societies are taking a turn, or profit, on our cash.

Virgin says the new home loans that give you an overdraft facility are better. "While it's in the interest of the traditional bank and building societies to charge different rates of interest for savings and borrowings, it certainly doesn't benefit their customers," says Jayne-Anne Gadhia, managing director of Virgin One. "Our customers like the fact that they are constantly minimising their borrowing and can repay their mortgage several years early."

The Virgin One account is run by the Royal Bank of Scotland, the same staid institution that owns Direct Line, which has also introduced a new deal. "We provide a simple, straightforward product with no hidden fees, tie-ins or penalties," Direct Line's Stephen Geraghty says.

The two approaches are vastly different, yet offer equally interesting deals for the right borrower. But that's the nature of the market today. Many of the new mortgage lenders want to grab their own little pocket of customers. The flexible mortgage is attractive but will not be right for everyone. The simple no-frills approach can be a much better option for some.

There is a drawback to flexible mortgages: the cost. When you consider that both Kleinwort Benson and Virgin Direct charge 8.2 per cent, that doesn't seem bad compared with, say, Halifax's standard variable rate of 8.7 per cent. But the rate seems less competitive against Direct Line's 7.94 per cent.

In fact, few new borrowers pay the standard rate. Most naturally prefer to enjoy the lower cost of a discount or fixed-rate mortgage. The good news is that these are available from most high street lenders.

Another growing band of new mortgage lenders are known as the nonconformists. Before any beatniks or "travellers" rush to sign up, you should know that these lenders are offering mortgages to those who can't get a mortgage on the high street because they have a poor credit record or a county court judgment against them.

The idea has been imported from America and, indeed, some of the new UK lenders are American-owned companies, names such as Future Mortgages, Kensington Mortgage Corporation, The Money Store, Preferred Mortgages, Southern Pacific and Transamerica. But altruistic they're not. They are simply mopping up a gap in the market, and charging borrowers a pretty penny for their trouble.

You should expect to pay around 10 per cent for a loan from these lenders. That is high but as Michael Bolton at National Home Loans points out: "We hope that after two to three years borrowers can switch to a traditional rate mortgage. By then, they will have shown that they can meet their monthly mortgage commitments and so will be given a better hearing in the high street."

Bank of Scotland Mortgages Direct: 0800 810810; Direct Line: 0181-649 9099; Future Mortgages: 01189 514 940; Kleinwort Benson: 0171-956 6600; Legal & General: 0500 666555; Virgin Direct: 08456 000001