Treasury unveils plan for low-cost home loans

THE GOVERNMENT yesterday unveiled plans for a standardised set of mortgages designed to cut the cost of home loans for millions of house buyers.

THE GOVERNMENT yesterday unveiled plans for a standardised set of mortgages designed to cut the cost of home loans for millions of house buyers.

The long-awaited CAT (cost, access and terms) standard for mortgages sets minimum standards on issues such as redemption penalties and arrangement charges for kite-marked products. Crucially, the Government is recommending that interest be charged daily rather than annually as it is on most conventional mortgages - a move which at a stroke would save £73 a year on a £75,000 loan.

The standards are designed to make it easier for home buyers to cope with the 4,500 mortgage products now on offer. Launching a consultation paper, Melanie Johnson, Economic Secretary to the Treasury, said: "The CAT standards will be the benchmark for mortgages. With a CAT standard mortgage you will be able to tell at a glance what you expect from each product and what is expected from you. And you can rely on facing no restrictive, unfair or complicated conditions which are hidden or which you do not fully understand.

"Getting the right mortgage really matters," she said. "It is one of the most important decisions most people take."

The proposals, which follow plans to simplify home buying earlier this week, are part of a wider Government effort to tidy up the financial services industry and make it more accessible to ordinary consumers who find the plethora of products and associated jargondeeply confusing.

The Government has already unveiled similar CAT standards for individual savings accounts (ISAs) and plans similar benchmarking for stakeholder pensions.

To qualify for the CAT standard, mortgages will have to meet these basic criteria: no separate charges for mortgage indemnity guarantee insurance (which protects lenders against borrowers not being able to make payments); all other charges to be disclosed up front; no separate arrangement fee; and interest to be calculated daily, not annually.

CAT standard mortgages will be both variable (the interest rate moves up and down with the base rate) and fixed. For variable mortgages the Government is proposing that a limit be placed on lenders charging more than a specified amount above the Bank of England base rate - a mechanism to ensure that rate cuts are passed on to borrowers.

For fixed or capped mortgages ( where the interest rate is subject to an upper limit) redemption penalties are only permitted during the period of fix, or cap, but not once that period is over.

Marketing literature should also be clear, fair and not misleading. Tying the loan to the sale of another product - for example, home or contents insurance - is banned.

Ms Johnson stressed that the CAT standards will be voluntary and should not be taken as a guarantee of quality or that the product is suitable for every category of borrower. However, it is widely assumed that CAT mortgages will soon be the norm for most home buyers.

Leading mortgage lenders are broadly in favour. Andrew Pople, head of retail at Abbey National, said: "We would like to see CAT standard mortgages become the norm rather than the exception."

However, the Council of Mortgage Lenders - the industry lobby group - said there was a danger that home buyers would "assume that CAT mortgage equals good and non-CAT equals bad, which will not necessarily be the case".