Stop the big mortgage rip-off

MORTGAGE lenders faced tough new curbs today after a Government-backed investigation found they are overcharging their most loyal customers.

A report ordered by Chancellor Gordon Brown demanded a ban on cheap interest rate deals targeted only at first-time buyers but denied to others.

Lenders would be forced to issue all customers with annual lists of their different interest rates. They would then be free to choose any rate on offer.

Its author, Professor David Miles, concluded that banks and building societies are able to offer the special rates because they charge over-the-odds interest to long-standing borrowers on the standard variable rate.

The criticism comes 24 hours after MPs lambasted the City over the £40bn endowment mortgages scandal.

In a 20-point plan for the industry, Professor Miles set out a series of measures to encourage borrowers to switch to better deals. Lenders would be forced to issue all customers with annual lists of their different interest rates. All customers would be free to choose any rate on offer.

And mortgage advisers would have to set out a series of 'what if' scenarios to make homebuyers aware of what could happen if interest rates shot up unexpectedly.

Today, Professor Miles said he hoped the Government and industry would implement his proposals. 'I think the key issues are giving people better information, having pricing that is transparent, fair, sustainable and allowing people to make choices based on good information.'

The Treasury welcomed the professor's final report. The Financial Services Authority, which regulates lenders, is expected to adopt most of his recommendations.

In an interim report in November, Professor Miles, of Imperial College, warned lenders he might call in the Office of Fair Trading to examine whether 'cross subsidisation' between different classes of borrower was illegal.

Today that threat was lifted. The professor confirmed that he considered the practice 'undesirable' but said the FSA had the powers to force lenders into line.

Around one in three homebuyers pays interest at the standard variable rate. The proportion is falling, however, as more realise they could get better value by switching.

Professor Miles was asked to investigate amid concern that US-style loans, where interest rates are fixed for as long as 25 years, have failed to take off in Britain.