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Cat claws at margins

The Treasury says Cat-standard mortgages are straight- forward, clear,

fair and easy to understand.

After reading the four-and- a-half pages of the Treasury&#39s document

embodying the standard, none of these descriptions sprang readily to mind.

On account of this, it is undoubtedly going to take providers some time to

absorb and evaluate the new stand-ard but those with products that meet it

can from now on legitimately advertise their products as Cat-standard.

The final version confirms the Government&#39s intention to make the standard

as inclusive as possible by covering an expanded range of both capital

repayment and interest-only mortgages, new and existing borrowers and by

deciding borrowers would not have to borrow more than £10,000 to qualify

for a Cat-standard mortgage.

The final standard differs from the draft issued in January by extending

the types of mortgages covered to include discounted and cashback loans.

These represent around one-third of all mortgage business written and it

would have been perverse to exclude them from the Cat- standard domain.

The final draft divides mortgages into two groups – variable rate and

fixed or capped rate. Within these two groups, there are conditions

relating to charges, access and terms. For charges, there are some common

conditions and some specific to each mortgage type. For access and terms,

all conditions are common.

As far as the common conditions for the two mortgage types are concerned,

under the charges heading, the final standard clarifies the payment of fees

by borrowers to brokers by specifically banning them. It also states the

timing for crediting all payments in a slightly different way.

All payments must be credited in full when they are cleared through the

banking system, with interest adjus-ted accordingly. This means the final

repayment to close a Cat-standard mortgage cannot include interest for any

period after the date of the finalpayment.

Where access is concerned, the only change is that borrowers should not

have to borrow more than £10,000 to qualify for a Cat-standard mortgage.

Under the terms section, the standard now stipulates that lenders need to

give borrowers at least three months&#39 notice of any upward variation in

fees or other terms not to the borrowers&#39 advantage other than changes in

interest rates.

Whereas the draft standard said that borrowers in arrears equivalent to up

to three months&#39 repayments should pay only standard interest charges on

the outstanding debt, the final standard extends this period indefinitely.

In general terms, the main areas in which providers will have to adjust

their practices in order to meet the standards principally relate to the

calculation of interest, the timing of the crediting of payments, including

lump-sum payments, defining any outstanding redemption liabilities in cash

terms and areas of portability.

The first three confirm and to some extent tighten the draft standards,

the requirement of portability has several aspects which indicate a

loosening of the rules.

Portability is generally thought of as being able to continue a mortgage

when moving from one property to another. The final standard int- roduces a

number of clarifications to the original borrower&#39s entitlement to continue

the loan, provided that the lender is prepared to lend on the new property.

The lender should let aborrower continue with an existing mortgage if the

new property is acceptable as security and the borrower remains

credit-worthy.

Providers would be well within their rights to limit the sizes of new

mortgage offers to those of the original Cat loans or to offer new

mortgages only at different rates.

This and other clarifications to the recommendations suggest that, whereas

portability is an important condition within the Cat standard, it has been

framed so loosely that it carries no real weight.

The standard also makes existing borrowers eligible as new borrowers for

Cat-standard products without incurring penalties. At present, the mortgage

market caters principally for new borrowers.

In issuing the final version of the standards, the Government has put the

seal on its policy of altering the culture of yet another area of personal

finance.

Already, concerns over the potential negative impact of the Cat standards

are being voiced. Providers may decide to attach higher interest rates to

Cat mortgages in order to “pay” for Cat requirements such as daily

calculation of interest.

Consumers could be encouraged to go for Cat-standard loans but have to

suffer higher interest rates for a refinement that is never likely to be

used. In the same way, since brokers are unable to charge fees for

recommending Cat mortgages, they could be reluctant to do this even though

it may be in consumers&#39 best interests.

A further concern relates to the potential knock-on effect on savings

rates of mortgage providers having to offer the same Cat-standard deal to

existing customers. New customers get the best terms. Forcing providers to

offer similar terms to existing customers to meet Cat standards will

obviously need to be funded.

This could encourage providers to reduce savings rates to maintain their

operating margins.

In setting out to define a set of mortgage attributes that are in

consumers&#39 interests, the Government may have stipulated conditions that

the ind-ustry may not rush to meet.

The Government also did not take the opportunity to introduce its own view

of prudent lending by not set-ting limits on the loan to value ratios or on

borrowers&#39 inc-ome multiples.

It has left these up to the lender in the same way it has left regulation

to them rather than to the mortgage advisers in the field.

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