'Truth war' over home loan rates

MORTGAGE providers, already under fire for penalising existing borrowers by offering lower rates only to new customers, are now being accused of misleading both sets of borrowers as to the true cost of their loans.

Providers routinely offer borrowers 'outdated and misleading' figures for the annual percentage rate of interest, according to a leading firm of actuaries. The allegations, by Bacon & Woodrow, could hot up the 'truth war' between lenders, already divided over what to do about existing borrowers locked into fixed-rate mortgages when new borrowers are wooed with apparently cheaper deals.

Halifax is opting to compensate all existing customers on its book and scrap its two-tier system, but others are toughing it out.

Bacon & Woodrow is urging the claims of an alternative system upon mortgage brokers, the Consumers Association and the Financial Services Agency, which is now investigating the truthfulness of advertisements for the competitiveness of mortgage products. Providers are required by the FSA to quote an APR based on a maturity term of 25 years, but few do so for shorter terms.

'This is outdated and misleading because the average mortgage lasts no longer than four years these days, and one in three existing mortgages is a remortgage as people take advantage of special deals,' said Bacon & Woodrow partner Rebecca Hansford.

Bacon & Woodrow is advising providers to head off possible trouble with the Advertising Standards Authority or even allegations of mis-selling by complementing the single APR quote with a 'mortgage repayment measure'.

This would show in table or graph form the cost of the mortgage over periods shorter than the one-size-fits-all 25-year APR, quoting an average annual rate of interest charged for that particular term, less costs such as early redemption charges.

APR is being manipulated, Bacon & Woodrow alleges, to show little difference in cost between schemes, when early repayment charges can mean a difference of £4,000 in interest over the life of each £100,000 borrowed. Hansford said: 'The way APR is now quoted is seriously misleading. Mortgages are too complicated for all the vital information on costs to be encapsulated in a single figure.'