Loans built on shaky foundations

If you want to buy a home in a hurry, a new development is just the thing. Many developers attract business by going out of their way to make the process as speedy and straightforward as possible - right down to sorting out your mortgage. Some estate agents also offer loan advice and, in a pressured market, it may be tempting to go with the adviser the agent recommends to save time and gain a possible edge over other would-be buyers. But neither route to a loan will get you the best deal.

Developers and agents may offer their advice via a consultation with someone "independent of the firm". But double check on their independence - they may indeed not be part of the firm (but the agents will get commission for passing on clients). He or she is often not a truly independent adviser. Most are tied agents - who can only sell for one firm. This is misleading and, given the current outcry about the continued sale of unsuitable endowments and unfair mortgage packages, it could soon land developers and agents in a lot of trouble.

Vinni and Eve Bellini, from Enfield in north London, believe they were misled by a developer. The BBC's personal finance programme Inside Money reports on their case tomorrow. Marketing specialist Mr Bellini and his accountant wife signed up for a two-bedroom house on a Fairview New Homes development and were encouraged to complete as soon as possible.

But, say the Bellinis, the help they were given meant they didn't have time to see a financial adviser of their choice. "We were told the quickest way for us to get a mortgage was to see the adviser they referred us to," says Mr Bellini.

That he could go to a mortgage broker or independent financial adviser (IFA) of his choice was not mentioned. Mr Bellini even says they were told that contacting an IFA would be a waste of time and could lead to unnecessary delays. "We were afraid there was a danger we could lose the property," he adds. So they agreed to the Fairview-recommended adviser. They now regret this. "We ended up with an endowment mortgage that we never really wanted," Mr Bellini says.

The Bellinis say they were interested either in a repayment mortgage, or a personal equity plan-linked loan, as Mrs Bellini already had a PEP mortgage from a flat she'd bought before.

But the adviser who came to see them, from Raymond Hurst and Associates, was never in a position to advise on a PEP mortgage: he was a "tied agent", not an independent. He could only sell the products of "his" firm, Winterthur Life, which did not then offer PEPs or their replacement, the ISA (individual savings account). So the Bellinis had to take out a repayment mortgage, or the endowment that they ended up with.

Endowments, very popular in the 1980s, have been criticised over the last few years, yet one in every three new mortgages is still backed by an endowment: the commission is very generous - a premium of pounds 100 a month earns the salesman about pounds 1,245 right away. Those figures are based on payments to IFAs. Selling a repayment mortgage will earn the adviser a fraction of this amount.

With interest rates so low, endowments look less likely to give policy holders a cash surplus once the home loan is paid off. There are worries that, in some cases, they won't make enough to pay off the loan in full. Endowment policies are also inflexible: they're long-term contracts (often 25 years) and penalties for stopping payments can be hefty.

Mike Macleod, of Everett Macleod, who is Mrs. Bellini's own IFA, believes the couple were given the wrong advice: "While I have no criticism of the loan that was arranged for the Bellinis, who didn't have the most straightforward circumstances, the advice they were given about how to repay the mortgage wasn't suitable. An endowment doesn't have the flexibility the Bellinis asked for."

Neither Raymond Hurst and Associates nor Winterthur Life would comment as the Bellinis have now made a formal complaint. Fairview Homes said in a statement that it "refers potential purchasers direct to lending institutions or to financial advisers independent from Fairview". It also points out that 35 per cent of purchasers use their own financial advisers or are cash buyers, and that it was not aware the Bellinis were unhappy with their mortgage until contacted by the BBC Radio 4.

Michael Coogan, director-general of the Council of Mortgage Lenders (CML), which has a code of practice, says all house buyers can pick the firm with which they set up a loan. "People should be aware they have choices," he says. "You do have the option of going to the market as a whole, to get advice from a lender direct, or to go to an intermediary of your choice."

But there's nothing in the code that specifically covers the relationship between developers and financial advisers. The CML say the code deals with the advice and information borrowers are given once they have contacted a mortgage broker, lender or IFA. Even if mortgage sales will be regulated by law, as seems certain, this area still may not be covered.

n `Inside Money': BBC Radio 4 Monday, 3.00-3.30pm.

WHAT TO DO IF YOU'RE BUYING A HOME

n Remember that you do not have to use the financial adviser suggested by the estate agent or developers.

n Ask if the adviser towards whom you are being directed independent or tied to one company.

n If you feel you are being steered in one direction, make sure you make complete notes of conversations or telephone calls, or ask them to confirm what they have told you in writing. It may be useful if you need to make a complaint.