Mortgage code cuts costs and charges

Proposals for minimum standards for mortgages, aimed at eradicating misleading terms and hidden charges, were announced by the government yesterday. They could reduce the cost of paying off a home loan for millions of borrowers.

The new scheme will enable consumers to see at a glance which mortgages offer a decent deal and comes in the wake of growing concern about mis-sold loans, punitive lock-in penalties and lenders not passing on interest rate reductions to borrowers. The system is likely to be set up within months.

The proposals set voluntary minimum standards for the fees charged and the contract terms of home loans.

One of the standards - a requirement that interest is calculated daily - could cut millions of mortgage bills by hundreds of pounds.

Interest payments are calculated for most home loans on an annual basis.

Virgin Direct estimated that on a £75,000 repayment mortgage, having the interest calculated on a daily basis as opposed to annually would save a borrower £73 a year, or more than £1,800 over 25 years.

To win the official seal of approval a variable rate mortgage will track the base rate; the rate people pay will be set at a fixed amount above the base rate.

The government is actively seeking comment on what this margin should be.

A number of lenders already offer so-called base rate tracker mortgages, and typically the margin is between 0.75% and 1% above base rate.

This measure is being introduced partly in response to public anger earlier this year about the decision of leading lenders not to pass on the full benefit of interest rate cuts to their borrowers.

Variable rate mortgages must also have no penalties for paying off the loan early, no arrangement fee and no separate charge for "mortgage indemnity guarantee" cover, which reimburses the lender if the borrower fails to meet repayments on the loan.

For a fixed and capped rate mortgage to meet the standards, early redemption penalties must not extend beyond the end of the offer period.

There has been growing concern about lock-in penalties, where the borrower is tied to the lender's standard variable rate for years after the fixed or capped period has ended. Other standards include:

• all mortgage documents and marketing literature must be expressed in language "which is fair, clear and not misleading";

• no obligation for the borrower to buy any other product, such as house insurance, with the mortgage;

• charges for arranging a fixed or capped rate loan must not exceed £200.

The new scheme has been dubbed the CAT standards - fair Charges, easy Access and decent Terms. These already apply to Isas, the tax-free accounts launched in April.

Melanie Johnson, the treasury economic secretary, said the scheme would put borrowers "in the driving seat".

She added: "CAT standards will be the benchmark for mortgages. You can rely on facing no restrictive, unfair or complicated conditions which are either hidden or which you do not fully understand."

The proposals have come as the government considers whether to replace the voluntary regulation of mortgages with statutory limitations.