CAT's claws will sort out the guilty lenders

Cheaper, more user-friendly mortgages are just months away after the government this week unveiled plans to clean up the industry by introducing minimum standards of fairness and simplicity.

The initiative aims to outlaw unfair practices, hidden charges and nasty small print, and will make it much easier to compare products. But the new regime is voluntary - lenders will not be forced to comply.

And the Consumers' Association has declared war on many of Britain's biggest lenders, naming and shaming those it says are the worst offenders and threatening court action if they do not remedy "unfair terms" in their loans.

The proposed new quality mark for mortgages will throw a lifeline to people struggling to work out which of the 4,500 products on the market is right for them. The system could be up and running by early next year.

There is one set of standards for variable rate loans and another for fixed and capped rate deals (discounted rate mortgages aren't included). To win the official seal of approval, a mortgage will have to meet a range of minimum standards covering cost, flexibility and clarity. These have been dubbed the CAT standards (it stands for fair Charges, easy Access and decent Terms).

In order to qualify, variable rate loans will have to be completely free of penalties for paying off the loan early, have no arrangement fee and have no separate charge for "mortgage indemnity guarantee" (Mig) insurance. They must also track the Bank of England base rate - the rate you pay will be set at a fixed amount above this rate. The government has not yet decided what this margin should be but it will probably be around 0.75%-1%, which would mean a current payment rate of 6%-6.25%. The Halifax's current standard variable rate is 6.99%.

Fixed and capped rate mortgages will be allowed to have early redemption penalties, but there will be restrictions on how much can be charged and they must not extend beyond the offer period. That means you will not be locked into a lender's uncompetitive standard variable rate when the fixed or capped period ends. Tying a loan to the sale of another product such as home insurance is not allowed and all documentation must be in plain English.

But for most homeowners the biggest single effect of a CAT standard mortgage would be seeing their interest payments calculated each day rather than each year. This makes a huge difference to the amount you pay over the years. Most lenders use the antiquated "annual interest" system, which results in people paying interest on debt they no longer owe.

Virgin Direct estimates that for someone with a £100,000 repayment mortgage, daily interest calculation would save them almost £100 a year or close to £2,500 over 25 years. The CAT standards will apply to new loans but lenders will come under great pressure to apply the rules to the mortgages held by millions of existing customers, or risk facing a mass exodus.

Twenty-four hours after the standards were unveiled, the Consumers' Association named the top 10 "worst" mortgage lenders. They were, in order, Halifax, Abbey National, Northern Rock, Woolwich, Nationwide, NatWest, Alliance & Leicester, Bristol & West, Bradford & Bingley and Barclays.

The CA also listed 20 popular "scams" used by the industry. Of the almost 1,000 complaints it looked into, 58% concerned redemption penalties. One of the worst cases involved a NatWest customer with a £60,000 mortgage whose redemption penalty has been as high as £41,000 - that's 136 times higher than the £300 quoted as a "representative example" in the original contract.

The way interest is calculated was the second biggest bugbear while deals that force people to take out the lender's expensive home insurance came third. Another case highlighted by the CA involved someone who took out a £99,000 Birmingham Midshires mortgage last year. The rate is 6.49% fixed for five years.

Someone who wants to quit within the five years must pay a penalty of six months' interest - more than £5,000. And then there is a requirement that the borrower takes Midshires' buildings and contents insurance for the whole five-year period - if this is cancelled at any time in the fixed period the interest rate rises from 6.49% to 6.74%.