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Mr. Barnes: I have great faith in electoral returning officers, and the best practice is excellent. However, a variety of practices are used, and clearly some registers are much more up to date than others, so best practice needs to be spread. I do not worry about placing duties upon electoral returning officers.
On amendment No. 27, I have faith that electoral returning officers will make good use of the different techniques available to them to get hold of information and to ensure that it is used only for compiling electoral registers. As I said, I should perhaps have tabled another amendment that included a provision for confidentiality that might have dealt with some of the worries expressed by the Minister. As the future will eventually bring improved electoral registration techniques, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 1, as amended, agreed to.
Mr. Simon Hughes:
I have one question for the Minister, and I will understand if he says that he cannot give me an answer now, but I would be grateful in that case if he would write to me. Schedule 2 amends the Representation of the People Act 1985 in relation to the franchise for the European parliamentary elections. The question that is often asked, when there is an opportunity, is when the Government will bring forward the legislative changes to make sure that the people of Gibraltar can vote in the European parliamentary elections, as they are entitled to do following the European Court ruling that says that they must be able to vote.
Mr. Mike O'Brien:
I shall write to the hon. Gentleman.
Question put and agreed to.
Schedule 2 agreed to.
Schedule 3 agreed to.
To report progress and ask leave to sit again.-- [Mr. Mike Hall.]
Committee report progress; to sit again tomorrow.
Motion made, and Question proposed, That this House do now adjourn.--[Mr. Mike Hall.]
Mr. Barry Gardiner (Brent, North):
I may not look like Barbra Streisand, but since the title of this Adjournment debate was published, I too have known what it is like to be hounded by the paparazzi. It has seemed like every mortgage lender in the country has beaten a path to my door to explain why their products are fair and reasonable, and why others--usually their competitors' products--are not. When I first approached Madam Speaker's Office and proposed a title for this debate, I suggested "Mortgage Rip-Offs". I must compliment the Speaker's assistant secretary for the courtesy and tact that he showed in persuading me that "Mortgages and Unfair Contract Terms" might be more appropriate. So what are these unfair contract terms, and why do so many people feel that they have been treated badly by their mortgage lender?
I shall first examine extended redemption penalties--or lock-ins as they are often known. Back in the days of the Conservative Government in 1994, with a stagnant housing market and the curse of negative equity, mortgage lenders tried to find a way to kick-start the housing market. They offered deals that were front-loaded to home buyers: discounted rates, fixed-rate schemes and even cash back. Clearly, the only way in which lenders could recoup the cost of such low-rate schemes was by locking borrowers into their standard variable rate for several years after the initial incentive had run out.
I am a fair-minded person, and if that were all there were to extended redemption penalties, I would say "fair enough". So what is the problem? It is this: if one signs a contract that committed one for five years to pay a supplier of orange juice, one would expect the contract to specify the cost that one could incur for the whole five years. If the price charged by the supplier could vary from year to year depending on the orange crop harvest, one would expect the fluctuating cost to be related to some index--the orange market juice index, perhaps--which would govern the shift in the cost that one would have to pay for one's juice.
One would not be happy with a contract that allowed the supplier to vary the cost of the orange juice after the first year by any amount that the supplier chose. One would certainly not be happy if the orange market index were falling yet the supplier could charge the same or even a higher cost for the juice or if one faced massive financial penalties for breaking such a contract and refusing to pay that inflated cost.
Such a contract would be one-sided; its terms would be unfair--or, in the language used outside Madam Speaker's Office, a rip-off. One would not be happy, yet that is exactly what happens when one purchases a mortgage with extended redemption penalties.
Let us imagine that someone takes out a two-year fixed rate that locks them in for three years beyond that to the lender's so-called standard variable rate. The person may not appreciate that the standard variable rate does not have to track any external index; it can entirely ignore the Bank of England base rate. Borrowers do not know--indeed, cannot know--what they are signing up to when they
agree to the contract. If subsequently they find that the contract is not acceptable, they face an often more unacceptable premium to bail out.
Two years ago, Mr. Pearson-Miles took out a two-year fixed rate mortgage with the Alliance and Leicester for £75,000. The mortgage was described as "portable". Now, he is moving to a bigger house, and needs to increase his mortgage, but the terms offered by Alliance and Leicester for the new bigger loan are not as favourable as those that it gives even to its new customers, and they are certainly not competitive.
Mr. Pearson-Miles has a choice. He can either pay the higher rate to Alliance and Leicester plc, where he is locked in for the next five years, or he can pay a £3,000 premium to take his mortgage business elsewhere. Mr. Pearson-Miles is unhappy.
Mr. Phillips was even more unhappy. In 1992, the day after the exchange rate mechanism fiasco, he took out a 10-year fixed mortgage with NatWest, at a rate of 9.95 per cent. With interest rates falling to 5.5 per cent., NatWest made a large profit out of Mr. Phillips, who had paid well over the odds for more than five years on his mortgage. Sadly, Mr. Phillips and his wife separated and the house had to be sold after seven years.
One might have expected NatWest to be sympathetic. After all, it had made a huge profit from Mr. Phillips's fixed rate. More than that, he was taking his subsequent mortgage from NatWest. Not a bit of it. NatWest insisted on levying an early redemption charge of £5,000 because Mr. Phillips had paid off his £100,000 debt before the 10 years were up.
In a case cited by the Consumers Association, NatWest asked for £41,000 in a redemption penalty to pay off a £60,000 mortgage. That is £101,000 to pay a £60,000 debt. I think that most people would say that that is a rip-off.
It is sometimes argued by mortgage lenders that lock-ins are not unfair in practice because no lender can afford to have an uncompetitive standard variable rate, so lenders cannot take advantage of borrowers who are locked in by redemption penalties by charging an excessive variable rate. Sadly, that is not true.
Ten years ago, prospective borrowers would compare the variable rates on offer, but that is no longer the position. Most lenders do not use the standard variable rate to compete for new business. They use the much more eye-catching fixed rates or capped-rate deals. Fewer and fewer borrowers every year are on the standard variable rate, without being locked in, because consumers are getting wise to the need to remortgage.
Even between the major high-street lenders there is a broad range where variable rates differ by as much as 0.6 per cent. This variation makes it impossible to tell up front which fixed rate will prove more competitive over the life of the fixed and penalty period combined. Such a lack of transparency in what is normally the largest financial contract most people enter into is a scandal.
There is another scam to which I draw the attention of the House. I call it the corporate come-on. The Halifax and Woolwich building societies are masters at it. At the end of the fixed rate period, they write to the borrower and offer him a further fixed rate deal rather than transferring to the penal standard variable rate. That seems extremely helpful to most borrowers, particularly when
they are told that they will not have to pay the redemption penalty that would have applied if they had switched to a different lender. So there is no £5,000 penalty charge, or at least not up front.
The lender kindly offers to roll that on top of the mortgage, so there is no shock to the borrower's financial system. It is a marvellous double whammy, for not only does the lender keep the business locked in for another five years but he charges the premium as if the borrower had left him and ensures that the borrower pays interest on it for the remainder of the mortgage term. As if that were not enough, the lender can offer the same come-on in two years' time when the next fixed rate expires. It appears that in the mortgage game, loyalty rarely pays.
That is what happened to Helen and Andrew Bradshaw. After two years at a fixed rate of 5 per cent., Northern Rock offered them another fixed rate deal at 8.5 per cent. That was in November 1998, when most rates were about 7 to 7.5 per cent. The Bradshaws knew that they would be better off remortgaging with another lender, but thought that they could not afford the £800 premium that they would have to pay. Remortgaging would have saved them £70 to £80 a month, but they did not have the capital to pay the £800 in one go. Of course, they could have rolled that sum up with a new mortgage and been better off. They did not realise that Northern Rock would do that anyway by imposing a redemption charge on their existing deal.
Northern Rock had also insisted that the Bradshaws take out their own Northern Rock home insurance policy. They thought that £600 was expensive for what was after all a modest home, but Northern Rock insisted. What the Bradshaws did not realise was that the following year the policy premium would increase by 20 per cent. to £720, despite their having made no claims. This bundling of other products in with the mortgage is another rip-off. It is a way of concealing the real cost of a mortgage. I am delighted that the Government have announced that they will legislate against such insurance bundling. They cannot do it soon enough.
The calculation of interest annually rather than daily or monthly is another hidden way for lenders to boost their coffers at the home owner's expense. On a mortgage of £150,000 with a rate of 7.5 per cent. over a 25-year mortgage term, the home owner will be charged an extra £3,870 if interest calculations are reviewed annually rather than monthly. The windfall to the lender is even greater if the same home owner pays off a lump sum of £10,000 at the start of the loan. If the interest is calculated on an annual rather than a daily basis, the home owner will pay an extra £48,700 over the 25-year period. Those costs may be hidden, but they are frighteningly real, and I urge the Government to take clear and effective action to stamp out such abuses.
Another similar abuse is when lenders cut savings rates two or three weeks before they cut their mortgage rates, or when the Bank of England base rate rises and they raise their mortgage rates a few weeks before they adjust their savings rates. The strange thing is that they manage never to get it the other way round, even though they claim that this is not a scam. In the last quarter of 1998, the clearing banks--Barclays, HSBC, Lloyds TSB and NatWest--are estimated to have netted a cool £40 million by operating that scam. Regulation should ensure that saving and borrowing rates are changed simultaneously.
I now come to regulation. Many lenders who have contacted me this week have urged that the Government should regulate the mortgage product more thoroughly. Others have urged the Government to regulate more thoroughly the advice given to the home buyer. It is my view that the Government must do both.
The House is aware that discussions have taken place today with Treasury Ministers about the most appropriate way to regulate the mortgage industry. I urge the Government to place the industry within the remit of the Financial Services Authority. Those of us who sat for long months on the Committee considering the Financial Services and Markets Bill are keenly aware that the rationale that lay behind the FSA was to create a single regulator to act as a one-stop shop for the public on financial services. That rationale will have failed if the largest financial contract that most people undertake in their lives remains outside the FSA's remit.
The FSA should become the regulator, and it should urgently review not just the contractual terms of mortgage products to ensure that they are fair and transparent, but the structure of selling these products. When I walk into a car showroom, I do not meet an automobile adviser: I meet a car salesman. When I walk into a department store, I do not meet a soft furnishings adviser: I meet a sales assistant. Why, then, when I walk into the Halifax, Abbey National, the Woolwich, Barclays or NatWest am I suddenly confronted not by a mortgage salesperson but by a mortgage adviser?
That person is not there as my agent, working to secure the best deal available for me. That person is not going to examine my financial position carefully before telling me that, sadly, the company has no suitable product, but, should I care to walk down the road, company Y will no doubt be able to help me. That person is there to maximise his or her company's profit. That person knows that the mortgage that may be better for me may not produce the same commission. How else can we explain the fact that one in three mortgages sold is still sold on an endowment basis?
Question proposed, That this schedule be the Second schedule to the Bill.
11.30 pm
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