CAT standards help you choose your mortgage

Borrowers will be put in the driving seat on mortgages following new proposals announced today by Economic Secretary Melanie Johnson.

New, easy-to-understand CAT standards will prevent confusing marketing and hidden charges. They will set out minimum standards for qualifying mortgage products in three key areas :

fair Charges
easy Access
decent Terms

There are two CAT standards : one for a mortgage charging variable interest rates, and one for a fixed or capped rate loan.

Announcing the proposed standards as part of the Treasury's on-going consultation on the case for statutory regulation of advice on and marketing of mortgages, Miss Johnson said:

"Getting the right mortgage really matters. It is one of the most important decisions most people have to take. This proposed CAT standard can help you make the right choice.

CAT standards will be the benchmark for mortgages. With a CAT Standard mortgage you will be able to tell at a glance what you can expect from each product, and what is expected of you. And you can rely on facing no restrictive, unfair or complicated conditions which are either hidden or which you do not fully understand.

"Everyone has their own mortgage needs, depending on their circumstances. And these needs change over time, as we decide to move home, change jobs, or start a family. To meet this wide range of different circumstances, there is a wide range of mortgages to choose from. Choosing between all these is not easy. There are around 4,500 products on the market.

"The details of all the different deals are not always easy to understand and compare: for example, can you switch providers later on if someone offers you a better deal or if you get poor service? Will you have to buy other products, such as insurance, with the mortgage?

"The introduction of the CAT Standard mortgage is part of a broad programme to improve consumer information and awareness of financial services, which is being carried forward by the Government and the FSA. We now need people's views and I urge people to comment. We need this standard to be as useful to people as we can possibly make it."

CAT standards will be voluntary, and not all mortgages will qualify. They are a benchmark. When customers see a mortgage presented as meeting CAT standards they will know its features meet certain minimum standards. It does not offer a Government guarantee or endorsement, or mean that it will necessarily be the best loan for every borrower. But a CAT Standard mortgage will be straightforward, clear and fair.

If a particular mortgage product does not meet the CAT standard, this does not necessarily mean that it is a poor product. It may be designed for certain people with particular requirements. But it puts potential borrowers on notice that it varies from the basic CAT standards. Then they can consider carefully why it has charges, access or terms different from the standard and whether these are suitable for them.

A consultation document to seek views on whether there is a case for statutory regulation of advice on and the marketing of mortgages was announced by the Treasury in July 1999 (HM Treasury press release 122/99). That consultation is continuing, and will close on 22 October. Decisions will be announced by the year end. The Treasury is launching this CAT standard now so that consumers and lenders can consider it alongside the questions of regulation. It is not intended to be a substitute for regulation, or part of the Government's conclusions on the appropriate regulatory arrangements. But it is part of the Government's drive to make sure consumers get the right information to make the best decisions about their finances. The CAT Standard could also complement any of the options outlined in the consultation on regulation.

Notes for editors

1. CAT standards are designed to identify a range of straightforward savings products which are simple, clear and fair so that savers and borrowers should feel confident about choosing them. They have already been widely welcomed and used by ISA buyers. The proposed CAT standard mortgage has the same aim, applied to mortgage products.

2. This is one of a number of initiatives to help protect consumers of financial services from confusing marketing and hidden charges. On 11 October, the Department of Environment, Transport and the Regions announced proposals to streamline the process of home buying and selling. Last week the Financial Services Authority launched a consultation on proposals for consumer "league tables" of information about different products. And in October 1998 the Treasury introduced a ground-breaking CAT Standard to guide people to a fair deal on Individual Savings Accounts.

3. There are currently about 4,500 mortgage products available to UK borrowers, from about 120 mainstream lenders.
4. Comments on the proposed CAT standards for mortgages are invited as part of the consultation exercise. These should be sent by 17 November 1999 to :

Janet Robbins
Rm 116/G
HM Treasury
Parliament St
London
SW1P 3AG

Telephone: 0171 270 5294

Fax: 0171 270 4694

5. The Financial Services and Markets Bill was published on 17 June 1999 (HM Treasury press releases 98/99 and 99/99.) Clause 20 sets out the reserve power for the Treasury to make a regulated activities order giving the FSA responsibilities to regulate a range of activities set out in Schedule 2 to the Bill.

6. The powers reserved under the Bill, if activated, would mean that the selling of mortgages would be subjected to similar rules to those governing the sale of other personal financial products, such as personal pensions.

7. The proposed CAT Standard attached contains some figures, which are illustrative. The Government would welcome views on whether these values are the right ones to so that the CAT Standard assures customers of the fairest possible deal.

8. Media enquiries about CAT standards should be addressed to Charles Keseru at the Treasury Press Office on 0171 270 5188.

CAT standards for mortgages

CAT standard mortgages are designed to be straightforward clear and fair. There are two: one for a loan charging variable interest rates and one for a loan which begins with a period when the interest rate is either fixed or subject to an upper limit (capped). Loans of this kind may not suit every borrower. There is no implied Government approval or guarantee.

The basic features of CAT standard mortgages are set out below and explained in the notes which follow.

	variable rate	fixed or capped rate
charges	No separate charge for mortgage indemnity guarantee insurance. Any other fees disclosed upfront, including any fees and charges which may be payable later in the mortgage. Interest calculated and accrued daily; compounded annually.
	No fee payable by the borrower for arranging the mortgage. Interest rate no higher than x percentage points above base rate. No redemption or early settlement charge at any time.	Any booking fee not to exceed [£200]. Any redemption charge during period when interest rate is fixed or capped not to exceed y months' interest; and must decline evenly (or faster) over this period. No redemption charge after the fixed or capped rate period.
access	No restriction to existing customers. Mortgage available on the normal terms on which the lender grants loans, including loans for the lender's normal range of residential properties, and the lender's standard criteria for creditworthiness. Regular repayments on a choice of z days of the month. Early repayments permitted at any time.
terms	All mortgage documents, including advertising and marketing literature, and explanations of charges, to be put in language which is fair, clear and not misleading. No tying in, ie no obligation for borrowers to buy any other product with the mortgage. Any linked special offers to be priced item by item, with discounts expressed explicitly where they apply. If the lender can no longer continue with CAT standard terms in an existing mortgage, borrowers must have at least [6] months' notice of the change. Borrowers in arrears equivalent to up to [3] months' repayments pay standard interest charges only on the outstanding debt (including accrued interest). After that period the lender may decide that CAT standard terms no longer apply.

As with CAT standards for individual savings accounts (ISAs), CAT standards for mortgages are voluntary. Lenders should compare the contractual terms of their mortgages for residential properties against the standards and may advertise a loan as CAT standard if it meets or betters them.

1. CAT standard mortgage 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. Even where a CAT standard mortgage may not be the most appropriate loan, borrowers may find it helpful to compare the terms of competing mortgages against a CAT standard mortgage to help assess value for money and see whether other products might be suitable for their circumstances.

2. The proposed standards are compatible with a number of different repayment vehicles: repayment mortgages, endowments and other instruments designed to repay interest only mortgages by building up a capital sum at the end of the mortgage term.

3. The variable rate CAT standard is compatible with loans where repayments are changed intermittently, eg annually, rather than adjusting with each change in mortgage interest rate, provided that the other conditions apply. Nor does this standard prescribe exactly when changes to mortgage interest rates should be made. Where interest rates must change to keep within the CAT standard, adjustments should be made within [4] weeks of reductions in base rate, with no restrictions in the speed with which mortgage interest rates should follow base rates upward.

4. The fixed or capped CAT standard does not prescribe the period over which the interest rate is to be fixed or limited. Where a redemption charge is made, it must decline to zero by no later than the end of the fixed or capped rate period: eg for a fixed term of n months, with a maximum redemption charge of R, the redemption charge at the end of the month should be no more than R(^n-m/_n). Where borrowers repay capital early, but not in full, redemption charges should be no more than pro rata to the total mortgage.

5. There is no implied promise that lenders will make a CAT standard mortgage available 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. The standard does not set maximum loan to value ratios nor income multipliers. Lenders offering CAT standard mortgages should offer them to a wide variety of borrowers, not just a subset of the most creditworthy.

6. Lenders must be committed to continuing to offer CAT standard terms to their borrowers once a mortgage loan has been made. Any deviation from the notice terms set out in the table should take place only in exceptional circumstances, eg if the regulator uses powers of intervention; in insolvency; or in extreme market conditions.

Proposed CAT standard for mortgages points for discussion

These notes explain the thinking behind the proposed CAT standards for mortgages and invite feedback on whether the objectives of clearness and fair dealing could be achieved more effectively by setting the standards in any other way.

Charges

As specified, many CAT standard mortgages will entail no payments other than interest on the loan outstanding and (where applicable) regular instalments of capital. As drafted, the proposed standard allows scope for certain fees, eg for paying out additional stages of loans which have been agreed for staggered release, provided these fees are clearly disclosed up front. There may be a case for specifying that no additional fees should be allowed, or alternatively for specifying precisely which kinds of fees are, or are not, permitted.
Lenders offering CAT standard mortgages are free to set the interest rate margin in relation to base rate for each borrower, or class of borrowers, according to their creditworthiness, provided that the interest rate is compatible with the CAT standard. For example higher interest rates might reflect such matters as the lender's need to finance mortgage indemnity insurance, or allowance for flexibility about repayment scheduling.
For the variable rate standard, the interest rate margin proposed allows some scope for variation among mortgage products with a limited degree of discretion for the lender on the timing of rate changes. As specified, the CAT standard includes both base rate trackers and variable rate loans where the rate charged is always within a fixed band above base rate, though not necessarily always at the same differential against base rate.
The fixed or capped rate standard specifies no set margin against base rates since this must depend on prices in the money markets when the lender finances a line of loans. Lenders can set any pattern of redemption penalty during the period when interest rates are fixed provided they never exceed the maximum in the standard.

Access

CAT standard mortgages are intended to be available to a wide variety of borrowers in a wide variety of circumstances. However, it would be unrealistic to insist that lenders make CAT standard mortgages available to any borrower on any property. Lenders must be able to make prudent judgements about the creditworthiness of borrowers and the acceptability of properties as security for loans.
As specified the CAT standard prevents lenders artificially restricting CAT standard mortgages to reserve them only for the most creditworthy borrowers or to offer them only on a subset of the range of properties on which the lender will normally make loans. There may be merit in setting a loan to value ratio up to which CAT standard mortgages must be available; or a maximum income multiple for a CAT standard loan; though these features would clearly interact with the lender's judgement about creditworthiness of borrowers.
The proposed standard is intended to allow borrowers to repay additional capital flexibly if they wish. There might be a case for allowing accrual of interest at least monthly, or alternatively specifying that any repayment above a certain amount ( eg a cash sum such as £100) should immediately (or within a specified period) reduce the borrower's outstanding debt.

Terms

The CAT standard prevents tying in, ie lenders could not insist that borrowers must buy other products, eg property or contents insurance, at the same time. This would not prevent lenders offering discounts to borrowers who chose to take a package of linked products, provided that any discounts are explicit and transparent.
The CAT standard mortgage is designed to ensure that lenders deal fairly with borrowers with modest arrears. It is not compatible with loans where penalty terms apply, perhaps for the remainder of the loan, after even brief periods of arrears. The standard does not prevent lenders charging interest on all debts outstanding, including any arrears. Lenders are free to stop offering CAT standard terms to borrowers if arrears persist beyond the specified period.
Nor does the standard prevent lenders offering mortgages where repayments may be varied flexibly from any standard pattern, eg allowing repayment holidays Any such arrangement must however entail no additional fee; and the interest rate charged must not fall outside the relevant CAT standard throughout.

Choice

The CAT standards as proposed do not cover every kind of mortgage on the market. The Treasury would be interested in ideas for other CAT standard, if possible in terms of specific proposals.