Are you being cheated by the mortgage lenders? Keith Sinclair describes the experience of two borrowers

WHEN Mrs Morag Mack, of Milngavie, near Glasgow, was moving house and hunting for a mortgage, she secured what she thought was the best deal available when she approached Northern

Rock, a demutualised building society and one of Britain's biggest mortgage lenders.

She took out a 25-year mortgage, in September 1995, with an interest rate fixed at 4.49% for two years.

At the time, she asked Northern Rock what would happen to the interest rate when the two-year period expired and, she claims, was told verbally that she would be offered another two-year fixed rate at the same rate being offered to new borrowers.

However, when Mrs Mack's fixed interest rate expired last September, Northern Rock said her interest

rate would increase to 8.45% - more than double the two-year fixed rate

of 3.99% then being offered to new customers.

Mrs Mack, who insists the written terms and conditions of the deal stated that Northern Rock would offer another fixed rate but did not specify what that rate would be, felt angry and cheated.

She considered taking a mortgage with a new lender but learned that she was effectively trapped with Northern Rock because, if she did so within five years, it would charge a penalty equivalent to six months' gross interest at the current variable rate of 8.5%.

It is, no doubt, a predicament with which many mortgage holders can empathise. But Mrs Mack is different from most borrowers. She is a director of Scotland's largest independent mortgage advisers, the Mortgage Advice Bureau, and if it can happen to her . . .

Another borrower, James Macdonald, from Glasgow's West End, has had a #52,500 mortgage with Alliance and Leicester for eight years and is currently paying the standard variable interest rate of 8.7%, taking his monthly payments to #359.04.

On inquiring about deals available to new customers on a #50,000 mortgage from Alliance and Leicester last week, Mr Macdonald was offered a four-year capped rate of 6.25% - which would reduce his payments to #244.79 a month - or a two-year fixed rate of 4.85%, which would reduce his payments to #189.96.

Mr Macdonald and Mrs Mack are just two of thousands of mortgage holders thought to be getting a raw deal on interest rates as banks and building societies offer discounted rates and fixed deals to new borrowers in a bid to attract customers.

According to the monthly magazine Moneyfacts, existing borrowers are subsidising these low rates offered to new customers and are paying monthly interest rates as high as 8.7% on their mortgages while new borrowers are, in some cases, being offered 0% interest.

Angry savers with obsolete accounts have already said they expect to be told if their money could be transferred to another account paying a higher rate of interest, and existing borrowers still paying the full standard variable mortgage rate are beginning to ask why they can't expect the same.

A survey carried out by Moneyfacts, which describes itself as Britain's leading authority on mortgage and savings rates, reveals that 12 lenders are offering their customers preferential rates if they have been borrowing from them for more than five years.

Bradford & Bingley offers the best loyalty package with a rate of 8.35% for borrowers who have been with the society for only two years, but this still represents a saving of just 0.2% on its standard variable rate.

However, these schemes compare badly with the rates some new borrowers are being offered.

A typical discounted variable rate for new borrowers is the 6.95% variable rate from Halifax, which gives consumers a 1.75% discount on the standard variable rate until January 31, 2003.

Moneyfacts claims it is unfair that these rates are not available to borrowers who already have a mortgage with those lenders, but are available to anyone who wants to remortgage with a new lender.

It says products available for ''switching'', where the borrower does not move house but wants a new mortgage with the same lender, are usually only offered under sufferance, and rates are not as competitive as those on offer to a new borrower.

Mrs Mack, who is a mortgage adviser, says: ''Basically, lenders want the best of both worlds. They want to tempt as much new business as they can at rates as cheap as possible but they want ultimately to increase those rates as quickly as they can and hold on to that business as long as possible.

''The problem is, they are not being fair about it because they advertise

the special rates but don't advertise what customers are normally being charged. That is kept quiet for fear of turning people away.

''I think they are more driven by profit motive than customer satisfaction, but ultimately they will pay a price for that because borrowers

are becoming more astute and those who seek advice from investment advisers will be well warned of

these situations.''

While there may not be enough specific evidence to prove that demutualised building societies are the worst sinners, most observers believe it is likely that they will be more inclined to operate this way in an attempt to satisfy their shareholders.

Mrs Mack says: ''Every business nowadays is looking for short-term performance and is looking to impress whoever owns them on a short-term basis.

''What it will make for is an awful lot of unhappy customers and a great deal of movement of customers between lenders. There will be no

loyalty whatsoever.''

But she forecasts that when the issue becomes more high profile, the more astute lenders will become much fairer and will, somewhat ironically, use that as a marketing tool.

''They'll see a gap in the market and say let's market the fact that we are going to play fair with people. That will win them more business, they'll keep it longer, and other lenders will follow. I just look forward to the day the ball starts rolling.''

The lenders, not surprisingly, reject the allegations made against them. Peter Wood, product director mortgages at the Royal Bank of Scotland, says: ''Existing customers would have at one time benefited from a competitive deal of some sort, just as new borrowers do now. Existing customers are therefore not losing out.

''Indeed, existing customers benefit over and above new customers in that if they move house they get as good a deal as a new borrower and if they stay put they can get a very competitive fixed rate and not have to pay

the #250 arrangement fee as a new borrower would.

''We are very open with all our mortgage customers about the deals available and advise existing and new borrowers alike to the deals that the bank has available.''

A spokesman for the Northern Rock says all of its customers will have benefited from a front-end deal, whether a fixed rate or a cashback and, after seven years, received a loyalty bonus rate which currently stands at 8.25%.

Ms Michelle Weller, of Alliance and Leicester (Mortgages), which has 70,000 borrowers in Scotland, says it offers its complete range of mortgage deals to existing borrowers moving home, and new customers, at identical rates.

Dunfermline Building Society's head of marketing, Gordon Swan, says: ''In attracting new members,

we are operating in the market

and we have to compete. Therefore we have to offer terms to attract

new members.

''Our existing borrowers do

benefit from being members of a building society as our base rate of 8.45% is less than the 8.7% charged by the majority of the plc lenders, including banks and converted societies.''

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