Loan arrangers meet high noon

Navigating the mortgage minefield could soon become much less hazardous. The government this week launched an investigation into the £89bn-a-year home loans market which, it is hoped, will focus on the tricks, traps and pitfalls that consumer organisations claim are rife.

The government indicated it could curb such tactics by bringing in minimum standards for mortgages similar to those for individual savings accounts (Isas). These standards would lay down basic requirements on things like charges and flexibility. Mortgages meeting the standards could display the stamp of quality, offering an instant guide to the 4,000-plus different products on the market.

Launching the inquiry, treasury economic secretary Patricia Hewitt said she wanted to get a better picture of borrowers' concerns. If there is evidence that consumers are losing out, there would be a "powerful" case for replacing the voluntary code with statutory regulation.

This would subject mortgages to the same level of scrutiny as products such as personal pensions and unit trusts. Some experts say it is crazy that an endowment sold with a mortgage is covered by statutory regulation yet the home loan is not.

A decision is promised by the end of this year on whether the Financial Services Authority, the City watchdog, should police mortgages.

Also under consideration is a possible shake-up in the notoriously confusing APR figures used by lenders to show interest rates.

The Consumers' Association says statutory regulation is vital. "For years and years the mortgage industry has operated like an Arthur Daley, offering dodgy deals to the British public," it adds.

One alleged sharp practice ministers will look at is the failure of some of the biggest lenders to pass on the full benefit of interest rate cuts. This is costing the average borrower £19 a month, or more than £200 a year, while putting hundreds of millions of pounds into the banks' coffers.

The Halifax passed on just a small part of April's 0.25% base rate cut and took no action at all when the Bank of England reduced rates by a further 0.25% in June. That means the Halifax's standard variable mortgage rate currently stands at 6.85% when many would argue that, by rights, it should be 6.45%.

For someone with a £60,000 interest-only mortgage, this 0.4% differential means they are out of pocket to the tune of £19 a month, or £228 a year.

For a £100,000 mortgage, it's £32.33 a month or £387.96 a year.

With more than 60% of the nation's borrowers paying the standard variable rate, this adds up to very big bucks indeed.

It's estimated that mortgage-holders with the eight ex-building societies (Halifax, Abbey National, Alliance & Leicester, C&G, Woolwich, Northern Rock, Bristol & West and Birmingham Midshires) are being overcharged by a total of more than £600m a year compared with customers of a building society such as Nationwide, whose variable rate is 6.45%.

Other common gripes include mortgage lock-ins and compulsory insurance, which we highlight in our guide to mortgage traps.

So what is the government planning to do to bring the mortgage industry into line? One idea is league tables for mortgages. Another contender is so-called CAT (charge, access, terms) standards.

For example, there could be a requirement that the standard variable rate be no more than 1% or 1.5% above base rate, currently 5%. Several lenders manage this quite easily. Standard Life Bank's variable rate is 5.88%.

Other standards could include a requirement that base rate changes are passed on to borrowers within, say, 30 days; a ban on redemption penalties, so you are able to walk away at any time; and no compulsory insurances.

Virgin Direct suggests some other reforms, including daily interest calculation and the provision of a key features document and says the guidelines could be called the "TIRC" standards, standing for Terms, Information, Restrictions and Charges.

At the heart of the problem, according to many, is the fact that mortgage lending is regulated by a voluntary code of conduct policed by the industry itself. This code, introduced two years ago, contains pledges about the level of service people can expect, but is seen as relatively easy to sidestep.

The Council of Mortgage Lenders insists the code has begun to deliver better information and advice to borrowers and adds that it has other initiatives up its sleeve, such as the development of a "single page information sheet" for mortgages which would set out the key elements of the deal in a standard, easy-to-understand format. "We do feel our code is doing a good job," says a CML spokeswoman.

But there is no shortage of evidence to suggest the code isn't working. Earlier this year a report published by Suffolk trading standards department sent shockwaves through the industry. Its officers had carried out a mystery shopping exercise, visiting 31 mortgage brokers and posing as potential customers.

Not one of the brokers complied fully with the mortgage code, and half of them provided poor-quality information.