Some politicians never learn

Posted on 20 October 2009 by Ray Boulger

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Mortgage Strategy is reporting a call from Vince Cable for ‘stakeholder’ style mortgages to be introduced. He starts off well by saying: “With such a complex mortgage market already in existence highly prescriptive rules for mortgage affordability are not appropriate.” This is spot on but he then spoils it by saying “It is critical that a simple and safe ‘stakeholder’ style mortgage as the Liberal Democrats have proposed is introduced.”

Maybe Mr Cable has a short memory or maybe he is just not very familiar with the mortgage market. Either way if he had done a little research before calling for “stakeholder” style mortgages he would have discovered, or reminded himself, that the Government launched just such a scheme along these lines at the end of the last decade. They were called “CAT Standard” mortgages and bombed in a big way. Nationwide and HSBC were the only two lenders to embrace the CAT Standard and all their mortgages complied with it.

Other lenders either ignored CAT Standards or, if they wanted to be politically correct, launched a token product. After a while Nationwide very cleverly found a way around the rules banning ERCs on variable rate CAT mortgages by adding a very high, and hence almost worthless, cap to its trackers, which allowed it to include an ERC on these mortgages.

CAT Standard mortgages subsequently disappeared from the market for the very simple reason that the costs for lenders of meeting the CAT criteria meant they either had to price such mortgages at an uncompetitive level or take a margin hit. Consequently sales of the lone CAT Standard mortgage offered by some lenders were abysmally low because other products in their ranges offered better value for most people. In due course Nationwide and HSBC aborted CAT mortgages to avoid being at a competitive disadvantage.

All of the criteria required to meet the CAT standards had merit in themselves but few borrowers needed all the features and that was the issue. Most borrowers who bought a CAT Standard mortgage were effectively paying for every CAT feature because each feature had a cost and it was all or nothing. Thus nearly every borrower who bought a CAT mortgage paid over the odds.

Why anyway is Mr Cable trying to reinvent the wheel? Even in the current market borrowers who want a simple mortgage have a choice of several - they are called lifetime trackers, and are offered by HSBC, Woolwich, First Direct, Abbey and several smaller lenders. Many of these lifetime trackers offer excellent value, including some on an offset basis. However, no doubt Mr Cable would not class an offset mortgage as simple and would therefore dismiss it, even if it was offered at a cheaper rate than its non offset equivalent, as was the case with Woolwich lifetime trackers as recently as August this year.

If Mr Cable ever has further thoughts about calling for a new mortgage product he should consult a good independent mortgage broker first to check whether the market is ahead of him.

Categories: Mortgages, Regulation

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