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11.47 pm

The Minister for Competition and Consumer Affairs (Dr. Kim Howells): My hon. Friend the Member for Brent, North (Mr. Gardiner) has raised an issue that is vital to many people, and he has done so with great panache and clarity. He has done us all a service because,

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as he said, the decision to take out a mortgage is one of the biggest decisions that an individual consumer makes. It is also a very personal decision: the object is usually to buy one's home or to make improvements to it.

As my hon. Friend pointed out, people taking out mortgages can be in a very vulnerable position. They are often under both time pressures and economic pressures in their keenness to acquire a new home, and they may make hurried decisions without studying all the small print. I do not think that I have ever studied the small print of any loan that I have taken out; it is often difficult to do so in the prevailing circumstances.

The Government are very concerned about the problems that some consumers have encountered with their mortgages--my hon. Friend listed some of them. As he said, my colleagues in the Treasury are considering whether mortgage advice should be regulated by the Financial Services Authority, and I understand that they will announce the results of their deliberations shortly.

My Department has responsibility for consumer protection issues, so we are also taking action on this important matter. Last year, my right hon. Friend the Secretary of State for Trade and Industry met the Council of Mortgage Lenders, major lenders, regulators and consumer groups to discuss mortgage problems. He asked the industry to consider what it could do to address the problems; he also said that he was prepared to use his legislative powers if necessary.

One of the major issues mentioned by my hon. Friend is unfair contract terms, and the question of what is unfair. All businesses--and mortgage lenders are no exception--should deal fairly and equitably with consumers. They should use contracts written in plain language that the average consumer can readily understand. Contracts should also clearly set out all the terms that apply, so that the consumer is not faced with a nasty surprise if, for example, he wants or needs to redeem a mortgage early. The examples that my hon. Friend gave were vivid and very common. The use of legalistic jargon and incomprehensible terms can deprive consumers of their legitimate rights, or, worse, make many consumers feel, mistakenly, that they have no rights at all.

The Office of Fair Trading has recently taken action under the Unfair Terms in Consumer Contracts Regulations 1999 against redemption charges. Such charges are justifiable for some types of mortgage, but the Government have been disturbed to learn of the level of the penalties that some people have been quoted--my hon. Friend mentioned some--to redeem their mortgages. I am also concerned about the complex formulae that some lenders have used to calculate the redemption charge. It is unreasonable to expect ordinary consumers to be able to understand how the formulae will operate if they want to redeem their mortgages, especially as few house buyers will be thinking about the consequences of early redemption when they take out their mortgages.

One of the more extreme examples of such formulae prompted the OFT to contact the lender, using its powers under the regulations. Following the OFT's intervention, the lender concerned--it was NatWest, which received quite a bit of publicity--agreed to cap its redemption charges for fixed-rate mortgages at no more than 5 per cent. of the sum redeemed where the original loan was for five years or less. For loans of five years or more, the cap is 7 per cent. However, those charges are significantly

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smaller than what would have been charged using the original redemption formula. I am pleased that the OFT action has resulted in a fairer deal. Where the lender intends to impose a redemption charge, it is crucial that consumers are told about that up front and transparently. I am glad that my hon. Friend emphasised the importance of that initial transparency. In the current market, where many mortgages are redeemed early, consumers need that information to be sure that a mortgage will provide a good deal, both when it is taken out and in the future.

My right hon. Friend the Secretary of State raised redemption penalties at the mortgage summit that he organised. Lenders have agreed either to quote cash figures for redemption charges in the initial mortgage information or, where that is not possible, to impose a cash cap. That undertaking will ensure that consumers should have a clearer idea of the consequences of early redemption before they choose a mortgage and can take that factor into account when they decide which mortgage is best for them.

My hon. Friend dealt briefly with another important issue: the annual percentage rate and the way in which it is advertised. It is one of the main hooks that cause people either to take mortgages or loans, or to reject them. I am sure that he will recall that, last November, the Government laid regulations that will make it easier for consumers to compare mortgage deals. From April, all lenders will have to use a standard method for calculating APR. They will no longer be able to advertise a mortgage with a low introductory rate--that is the hook--on the misleading basis that that low rate will last throughout the entire period of the loan.

The new regulations will require lenders to take into account the fact that, once the low rate period has ended, the interest rate will change to the lender's standard variable rate. Consumers will be able to feel confident that the advertised APR gives a better reflection of the true cost of the loan throughout the lifetime of that loan. That is an important advance.

My hon. Friend also dealt with the matter of annual versus monthly interest, which is a very important consideration. Many lenders are still using annual interest systems to credit mortgage repayments--so that the outstanding balance on a mortgage is adjusted only once a year, regardless of when repayments are made or their amount. Compared with an equivalent mortgage that charges interest on a daily or monthly basis, a consumer who is charged on an annual interest basis may expect to pay substantial additional interest during the life of the loan. It was another subject that my right hon. Friend the Secretary of State raised at the mortgage summit.

Our new APR regulations take account of whatever system the lender uses, so that consumers are able to see which deal is cheapest overall. However, many new entrants to the mortgage market make a virtue of the fact that they do not use annual interest rates. We should like established lenders to move away from that practice, both for new and existing customers. Some of the biggest lenders have already said that, this year, they will be updating their systems. However, even when there will be

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some delay before they are able to change their systems, we believe that lenders should be looking to give full and immediate value for overpayments as quickly as possible.

My hon. Friend also mentioned the tying-in of insurance, which is a worrying trend. Some consumers who want to get the best mortgage deal from a particular lender have to buy tied home or other insurance--a practice that I have encountered in dealing with another aspect of my portfolio, the travel industry. Many people who want to obtain good package travel or holiday deal are expected to buy insurance that is often delivered at sky-high prices.

In the mortgage market, the price of compulsory insurance does not have to be competitive because the borrower cannot shop around for the best deal. Currently, it seems that relatively few lenders require the purchase of tied insurance, but we are concerned that the practice could become more widespread. My right hon. Friend the Secretary of State recently announced that legislation will be introduced at the earliest possible opportunity to make it illegal to force consumers to take out certain insurance policies linked to a mortgage. We intend to publish a consultation paper on the matter in the spring, and legislation will follow.

I am sure that my hon. Friend will be aware that there have been regulations protecting consumers against unfair terms since 1994. However, in October 1999 the Government changed the law to enable more organisations to take action against businesses that use unfair terms in their standard contracts with consumers. I was very keen on that initiative.

Since the beginning of October, the Consumers Association--which is one of the named organisations--the statutory industry regulators and local authority trading standards officers--who are the stalwarts of consumer protection--have had the power to apply for court injunctions to prevent the continued use of unfair contract terms. It is a very important initiative, and the Consumers Association has not only signed up to it, but is very keen to be seen as the sponsoring agency in relation to the mortgage sector.

I expect formal court action to be very rare. The vast majority of complaints that the OFT has investigated since the regulations came into force have resulted in a negotiated change to the unfair term. I fully expect--and would encourage--the process of resolution to be by informal means, rather than by court action. As my hon. Friend said, much will depend on the action of the FSA.

The mortgage summit held at the DTI has demonstrated a willingness by the Government, lenders and consumer groups to address those major mortgage problems. Ministers and officials will be holding further meetings in the near future to ensure that they are overcome. I wholeheartedly support the work currently being done to remove unfair terms from mortgage contracts.

I thank my hon. Friend for raising the issue--on which, although we are making progress, much is left to be done. There are very good lenders out there, offering very good products and very good services, and those best examples must be replicated everywhere possible.

Question put and agreed to.



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