What did M-day do for you?

Shopping around for a mortgage should, in theory, be easier and quicker than it used to be, thanks to regulations introduced last October. The new rules brought home loans under the jurisdiction of the consumer watchdog the Financial Services Authority (FSA), in line with other financial products. The complaints system was also simplified, so that anyone with a grievance could take it to the Financial Ombudsman, who also investigates any complaints against investment providers.

As part of the plans to make sure that customers were given a fair deal, the rules specified that all lenders produce a "key facts illustration" (KFI). This gives details of the mortgage in question, including the total cost of the loan over its term - for most people 25 years - and how much you will need to pay should interest rates rise.

Ringing the changes
The new rules came into force on October 31 2004 - a date known in the financial services industry as M-day. The FSA took on direct supervision of thousands of firms which lend, administer, advise and arrange home loans for 2.75 million UK borrowers each year. The idea was to make shopping around much easier, yet some in the industry say that the move has actually discouraged borrowers doing proper research because the advice process has become too time-consuming.

Ray Boulger, senior technical manager at national mortgage broker John Charcol, says KFIs can be nine pages long and that customers may not be able or willing to read through all the information they receive. "In general, the changes are good because they clearly show consumers what the mortgage is going to cost them," he says. "But although the KFI is supposed to be standardised and aid customers in shopping around, it may actually confuse people. Showing what would happen to repayments if interest rates rose by 1% is useful, but including the annual percentage rate (APR) over 25 years is not. This is because most people change their mortgage after two years. Also, the APR ignores cashback deals and free valuations."

He adds that the advice process, known as the "fact find" is supposed to ensure borrowers get clear and good quality information. But since it now takes around one-and-a-half hours to complete, borrowers will be reluctant to repeat the process with more than a couple of lenders. Melanie Bien of broker Savills Private Finance agrees that the new paperwork is "over-long", but says the changes have been good for consumers. "The concept of treating customers fairly (TCF) runs through the M-day guidelines and means that people should find it easier to get redress." She says that most brokers who implemented high standards of best practice in selling home loans didn't find the changes particularly onerous. But those that needed to retrain staff or introduce new computer systems have had to spend a lot of money on the process, and lenders have described the process as "lengthy and costly".

Extra costs
In practice, the new rules have cost lenders around £100 for each customer, according to calculations by their trade body, the Council of Mortgage Lenders (CML). "It's the consumer who is having to pay the extra as the fees are going up to cover the cost of regulation," says Boulger. Arrangement fees, which range from £300 to £900, are becoming more common, as are exit fees, which borrowers pay if they wish to end their relationship with a lender. Some lenders have been putting up exit fees, which can be as high as £295, a few years after borrowers have taken out a mortgage. "At this stage the customer is a soft option," he says.

There are also suggestions that customers have less choice because the more innovative mortgage products are too complicated to illustrate in the KFI document and have been shelved. On the plus side, financial advertisements now have to be clearer and fairer, so borrowers shouldn't be caught out by high fees buried in the small print. For example, if a very low two-year fixed rate deal has an expensive five-year extended tie-in when the fixed period ends, this has to be spelled out properly.

Interestingly, complaints have risen dramatically since the system was introduced - from 100 a year to more than 500 over the past 12 months. Boulger thinks this is because the M-day changes make it much simpler and easier to make a complaint - something which should benefit consumers. People can check that their mortgage firm is regulated, and that they will be able to make a complaint if they need to, at www.fsa.gov.uk using the "firm and person check" service.

Louise Cuming, head of mortgages at online broker Moneysupermarket, points out that buy-to-let mortgages are not under the regulatory umbrella. "There is a gaping hole when it comes to the buy-to-let sector, despite this becoming an area of growing importance. Indeed, interest is set to increase still further in anticipation of new Sipp rules which come into effect from April 2006."

Doing the paperwork
If you have a mortgage you arranged before last October and are considering remortgaging, the process will probably seem more bureaucratic than it did. Both first-time buyers and remortgagers will find that they are no longer just able to pop into a high-street bank or building society and take away an application form. If you want any help with choosing a loan, your chosen lender will be under an obligation to give you proper advice and ensure you can repay your loan.

Colin Dale, head of lending at the Skipton building society, says: "Part of the M-day rules is a strong obligation to lend responsibly, so you will have to convince the building society that you really are able to repay the loan." Some lenders provide full advice, which means a fact-find process in which you are asked for details of your income, other loans, and financial commitments. They will have to spell out exactly how the mortgage will work and which product is best for you. "Even those lenders who don't give the full advice will have to ask you key questions and make sure you understand what you are buying," he says.

As a result, brokers are becoming the beneficiaries of the changes, as consumers are using their services for shop around for the best deal. Wes Cornell, 24, and his wife Katherine, 22, who live in Leicester, used Savills to find a mortgage, since he runs his own business and found that high-street banks were unwilling to give him a loan. "I just don't have the time to shop around and look at every deal so I went to a broker who could search the marketplace for me. I found the new illustration document useful, as it is first house I have bought. I also liked the see the outline of what it was going to cost me over 25 years, so that I can put it against my own life timeline and work out when I would be able to pay it off."

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