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10 April 2000
FURTHER BENEFITS FOR BORROWERS: CAT STANDARDS FOR MORTGAGES FINALISED
All mortgage borrowers, new and existing, can benefit from the extension of the CAT standards for mortgages announced today by Melanie Johnson, Economic Secretary to the Treasury.
The definitive details published today build on the decisions about mortgage regulation announced on 26 January. More types of loan will be eligible for CAT standards, so that borrowers will benefit from the security of low charges and no surprises across a wider choice of products.
The key elements of the extension are:
- certain discounted and cashback loans can now qualify;
- brokers cannot charge borrowers fees on CAT standard mortgages;
- borrowers should not have to borrow more than £10,000 to qualify for a CAT standard mortgage.
Commenting, Melanie Johnson said:
"When I announced the CAT standards for mortgages in January, I said that we would look closely to find more benefits for borrowers as the final details were agreed. That process is now complete and I am pleased to announce the results of that work today."
"CAT standards will be an important part of providing simple, clear, easily comparable information to consumers. All borrowers stand to benefit be they first-time buyers or existing mortgage holders, and regardless of their property's value or location. Even those who choose non-CAT standard products should find them useful as benchmarks to judge how the alternatives measure up."
"Following discussion with the industry I have decided that borrowers should not have to borrow any more than £10,000 to qualify for a CAT standard mortgage. So even people who have repaid a lot of their original loan will have the opportunity to remortgage to a CAT standard loan. This will keep lenders on their toes to look after their existing borrowers."
Continuing, Miss Johnson said:
"The extended CAT standards I have announced today up the Government's challenge to the mortgage industry. There will be more marketing opportunities from the extended range of mortgages which can now qualify for CAT standards. And firms will be able to show the distinctive features of non-CAT products more easily. But because the CAT standard gives customers better, clearer information, it will no doubt add to the pressure for better value, fairer home loans for everyone. That is for the industry to deliver."
"From today any lender whose loans meet or beat the CAT standards can advertise their mortgages as CAT standard. It is already clear that a number of major players in the mortgage market are planning to offer CAT standard loans and I welcome their constructive response."
The announcement of the introduction of CAT standards has already had a positive effect for borrowers. Lenders are increasingly moving towards daily calculation of interest and immediate credit for payments. As CAT standard mortgages cannot be restricted to new borrowers, existing borrowers will be able to benefit from these features.
Discount and cashback mortgages will qualify for benchmark CAT standard status. Provided that these have no redemption penalties beyond the discount period, and meet other minimum standards, they can qualify under revised terms for CAT standard mortgages announced today.
The revision also includes further improvements to protection for CAT standard mortgage borrowers by ensuring for those products:
- no broker charges to borrowers for arranging CAT mortgages;
- no redemption charges when CAT mortgages are transferred to a new property;
- no separate charges for mortgage indemnity guarantees;
- no need to borrow more than £10,000 to qualify for CAT mortgages;
- no CAT mortgages which do not disclose ongoing fees in cash terms annually, with three months notice of 'increases';
- no CAT mortgages charging higher interest on or surcharging arrears.
The Treasury is working closely with the Financial Services Authority (FSA) to ensure that everyone considering taking out a mortgage will be able to get a clear, easy to understand explanation of what the CAT standards mean and what they offer.
A mortgage information booklet, which includes a pull-out summary of the CAT standards for mortgages, is available through the FSA. The FSA Guide to repaying your mortgage can be ordered through the FSA's leaflet line on 0800 917 3311 or downloaded from the FSA website (click below).
Both the booklet and the pull- out summary have been awarded the Clear English Standard by the Plain Language Commission.
The detailed specification to the mortgage industry for today's announcement accompanies this press notice. It can also be found on the Treasury's website.
Notes for editors
'CAT' stands for Charges, Access, Terms. The introduction of CAT standard mortgages was announced on 26 January (HMT press release 7/00). At the same time, the Treasury announced that statutory regulation requiring lenders to disclose all the main features of loans clearly and openly would be implemented under the Financial Services and Markets Bill currently before Parliament.
This package of measures to enhance and protect the interests of domestic residential mortgage borrowers was developed in the light of responses to the consultation document Regulation of Mortgages: a discussion document by HM Treasury published in July 1999 (HMT press release 122/99).
The responses showed that the vast majority of borrowers' complaints about mortgages related to the poor quality of information provided by mortgage lenders, which often failed to explain to them clearly the structure and costs of the mortgage offered in a way which would enable them to make a fully informed decision, with or without additional advice.
Details of and background to these decisions was set out in HMT press release 7/00 and accompanying press pack literature.
The new upper limit of £10,000 on the minimum loan size a lender can stipulate for CAT standard mortgages is important for two reasons. It will effectively stop lenders exploiting their existing borrowers (because lenders cannot deny existing borrowers the chance to remortgage to a CAT standard loan), and will also cope with regional variations in property prices.
Media enquiries should be addressed to Charles Keseru on 020 7270 5188.
CAT standards for mortgages
CAT standard mortgages are straightforward, clear, fair and easy to understand. They are minimum standards. Mortgages which qualify against the standards may offer borrowers better terms
There are two CAT standards:
- one for a loan charging variable interest rates
- one for a loan which begins with a period when the interest rate is either fixed or subject to an upper limit (capped).
The essential features of CAT standard mortgages are summarised for borrowers in the table below. The notes which follow explain and expand upon the table so that lenders can be clear what is expected of them.
variable rate fixed or capped rate
- Interest calculated daily.
- Full credit for all payments when made.
- No separate charge for mortgage indemnity guarantee (MIG).
- Any other fees disclosed in cash up front.
- Borrowers pay no fees to brokers.
- No arrangement fee.
- Interest rate no more than 2% above Bank of England base rate.
- When the base rate falls, interest rates must adjust within a calendar month.
- No redemption charges at any time. * Maximum booking fee is £150.
- The maximum redemption charge is 1% of the amount you owe for each remaining year of fixed period, reducing monthly.* No redemption charge after the fixed or capped rate period.
- No redemption charge if you stay with the same mortgage lender when you move home.
- If there is a minimum amount you must borrow to get a CAT standard mortgage, it has to be £10,000 or less.
- Any customer may apply.
- The lender's normal lending criteria apply.
- Provided your lender is happy to lend on the new property, you can continue with your CAT standard mortgage when you move home.
- If you make regular payments, you can choose which day of the month to pay.
- You can make early repayments at any time.
- All advertising and paperwork must be straightforward, fair and clear.
- You do not have to buy any other product to get a CAT standard mortgage.
- Your lender must give at least 6 months notice if they can no longer offer your mortgage on CAT standard terms.
- If you are in arrears, you should pay interest only on the outstanding debt at the normal rate.
Specification for lenders
For both standards
CAT standard mortgages:
- do not carry a government endorsement or guarantee;
- are not guaranteed to suit every borrower;
- may not be the best deal available.
CAT standards for mortgages are voluntary. Lenders should compare the contractual terms of any mortgage product for residential properties against the standards and may advertise a loan as CAT standard if it meets or betters them.
The CAT standards for mortgages may also be used as benchmarks. Lenders may find that it helps borrowers to compare mortgage products to a CAT standard mortgage. Even where a CAT standard mortgage may not be the most appropriate or attractive loan, borrowers may find it helpful to use comparisons of competing mortgages against a CAT standard mortgage to help assess value for money and see which mortgage suits their circumstances.
CAT standard mortgages should be easy for borrowers to understand. Once a borrower has taken out a CAT standard mortgage, it should give rise to no surprises nor unforeseen features.
Which mortgages can be CAT standard?
Both capital repayment and interest-only loans can qualify as CAT standard. Discounted, flexible and cash-back loans can also qualify provided they meet all the conditions set out here. (Cash-back loans include mortgages with free services such as valuation fees and solicitors' fees.)
The CAT standard does not set limits on loan to value ratios (ie minimum deposits compared to property value) or borrowers' income multiples (ie the maximum loan compared to the borrower's income). These are up to the lender, taking account of the borrower's ability to repay the loan.
Lenders may set a minimum loan size. If they do, it must be £10,000 or less for a CAT standard mortgage.
Which customers can get a CAT standard mortgage?
Lenders must make CAT standard mortgages available on the same terms to both existing and new customers provided they are creditworthy and propose to borrow on property the lender finds acceptable as security. (Existing customers may have charges to meet under the terms of a previous loan.) For the avoidance of doubt, this means that existing customers must be eligible to remortgage to a CAT standard mortgage.
Lenders do not have to offer CAT standard mortgages to every borrower on every possible loan. The standard does not override the lender's right to make prudent assessments of proposed loans. Lenders should assess both the creditworthiness of borrowers and the security of properties on which loans are proposed. But lenders should not restrict CAT standard mortgages to a privileged group.
Interest calculation and payment
Lenders must calculate interest on CAT standard mortgages daily. All borrowers' payments, without exception, must be credited in full when they are cleared through the banking system, with interest adjusted accordingly. This means that the final repayment to close a CAT standard mortgage cannot include interest for any period after the date of the final payment.
Where lenders agree regular monthly payments (including interest)with borrowers, the borrower may initially choose any day between the 1st and 28th of the month. CAT standard loans may also permit irregular payments, eg in flexible mortgages.
Portability
CAT standard mortgages should be portable. That is, lenders should let borrowers continue with their existing CAT standard mortgage product if the lender finds the borrower's new home acceptable as security and the borrower remains creditworthy.
This means, for example:
- on moving home, the borrower should be able to continue with a fixed or discounted rate still running on a CAT standard mortgage, up to the amount of the mortgage on the original property;
- alternatively, the borrower can close the original mortgage and start a new mortgage on the new property on different terms, whether CAT standard or not. The lender may charge its normal terms for closing the original mortgage and the borrower may face costs such as legal fees for opening the new one;
- the lender should offer the same mortgage product on the new property. This may not mean exactly the same interest rate, eg if the mortgage product has different interest rates for borrowers in different circumstances, and the new loan;
- the lender does not have to let the borrower top up the loan on the same terms on the new property, but may choose to do so;
- the lender does not have to continue a CAT standard mortgage on the borrower's new property if a CAT standard mortgage would not normally be available on the new loan;
- a new lender does not have to offer a CAT standard mortgage when the borrower changes lender.
Fees, charges and commission
Brokers cannot charge borrowers introduction fees for CAT standard mortgages. Lenders can pay fees or commission to brokers if this is disclosed to customers up front. When confirming loans arranged by brokers, lenders should make sure that borrowers are told that they have no arrangement fee to pay for CAT standard loans.
CAT standard mortgages cannot have explicit separate charges for mortgage indemnity guarantees, mortgage indemnity insurance, or any other equivalent fee the lender may charge. Lenders may however charge a higher interest rate to borrowers with smaller deposits provided that all the other conditions (including the interest rate margin for variable loans and redemption charges for fixed loans) are met.
Lenders should send each borrower with a CAT standard mortgage an annual reminder of any ongoing fees. There is no set timetable for sending this information. This information should include any sealing fees payable when a mortgage is fully paid off and any information about the charges which may be made if the borrower goes into arrears. Amounts should be expressed as the cash payment which would be due if the charge was made when the information is sent. Lenders should give borrowers at least 3 months' notice of any upward variations in fees or other terms not to the borrower's advantage, other than changes in interest rates.
The lender's commitment
Lenders must continue to offer CAT standard terms to borrowers once a CAT standard mortgage loan has been made. Lenders are of course free to stop offering a particular CAT standard product to new customers.
Once a CAT standard mortgage has been made, the lender should alter the notice terms set out here only in exceptional circumstances, eg if the regulator intervenes, if the lender becomes insolvent; or in extreme market conditions.
The variable rate standard
Lenders may choose to track the Bank of England's base (repo) rate at or within a given margin. The variable CAT standard can also be met if the interest rate on the loan always lies within the 2 percentage point wide band with a calendar month's lag.
The variable rate CAT standard mortgage includes loans where regular (typically monthly) repayments are changed intermittently, eg annually, rather than adjusting with each change in mortgage interest rate, provided that the other conditions apply.
The variable rate standard does not set a timetable for changes to mortgage interest rates. Where the mortgage interest rate must fall to reflect base rate movements to keep within the CAT standard, the cut should take place within a calendar month of the fall in base rate. There is no set routine for when mortgage interest rates should follow base rates upward.
A lender offering a variable rate CAT standard mortgage may offer different interest rates to different borrowers, provided that all loans in the CAT standard range meet all the CAT standard conditions. For example a lender's CAT standard mortgage product might have different margins against base rate according to the loan to value ratio of the mortgage.
The fixed or capped standard
The fixed or capped CAT standard does not set how long the interest rate should be fixed or limited. (Limited interest rate loans include collared mortgages ie loans where the interest rate can only vary between a fixed maximum and minimum.)
The standard sets a maximum redemption charge. It is 1% of the outstanding loan for each year of fixed or capped period remaining. The maximum falls month by month. The redemption charge on a CAT standard mortgage may be less than this.
If a borrower repays capital on a CAT standard mortgage early, but not in full, the redemption charge should be in proportion to the total mortgage debt, or less.
Examples may help explain. For a mortgage which is initially fixed or capped for 3 years, and which has an outstanding balance of £50,000 at the point of early repayment, the maximum redemption charge is £500 per year of the fixed period still left eg:
- in the 1st month it is £1,500, ie 3% of £50,000;
- at the start of the second year, with 2 years of the fixed rate left to run, it is £1,000, ie 2% of £50,000;
- after 2_ years, with 6 months of fixed rate left to run, it is £250, ie 0.5% of £50,000;
- if half of the loan is repaid early at the end of the second year, with a year of fixed rate left to run, it is £250, ie 1% of £25,000.
These examples are for the maximum redemption charge. A CAT standard mortgage may charge less than this but never more.
Lenders should remind borrowers with CAT standard mortgages each year how much the redemption charge would be, in cash, on the date of the reminder It may also be helpful to send information about how redemption charges may alter in future, but this is not essential.
If a borrower moves home staying with a CAT standard mortgage, but smaller, the lender may charge a redemption charge on the reduction in the original mortgage. That is, the part of the mortgage which in effect continues with the new property should not attract a redemption charge when the borrower moves house. For example, if a borrower reduces a CAT standard mortgage by _ on moving, the lender may charge a redemption charge on _ of the value of the debt outstanding when the move takes place.
The maximum reservation fee of £150 includes any other fees with equivalent effect, eg a fee to establish an account for a fixed mortgage. Borrowers may also have separate fees for the normal costs of establishing a mortgage, eg fees to solicitors and surveyors. These should of course be disclosed up front if the lender arranges these services and charges for them.