New mortage scandal for 'trendy' borrowers; Teresa Hunter wonders if

Sunday Herald, The, Dec 1, 2002 by Teresa Hunter

A new mortgage shortfall scandal is looming as it has emerged that those with "trendy" tax-wrapped homeloans are facing bigger black holes than the worst victims of the endowment crisis.

Mortgages linked to pensions, personal equity plans, and ISAs were each in their day the favoured loan of "fashionable" borrowers. However, after the last three years of tumbling stock markets, not only are they in many cases some 50% behind where they should have been, the money put into the plans is worth considerably less than when it was invested.

These loans were sold on the basis that the premiums would grow by 6% a year. For Isa mortgages, for example, to be on target the FTSE should now be standing at something like 7765. In fact it closed on Friday way lower than that at 4169.4, down 16.00 on the day.

The true picture is even worse as the charges on many of these schemes were relatively high by today's standards. Britain's biggest mortgage lender, the Halifax, a keen proponent of ISA mortgages when it was the first choice interest-only recommendation, took 7% of all premiums for its charges. This has now fallen to 5%, still a bit of a shocker.

Worse still, those with certain tax-linked loans are likely to be ignorant of their precarious position. Unlike endowment borrowers, who are regularly briefed their policy's shortfall, no one is telling these pension, Pep and ISA borrowers anything. Only after five years are plans reviewed and compared with their objectives. When that five years is up many borrowers are likely to face a nasty surprise.

But the real cracker is that millions of people are caught up in this problem, due to the endowment debacle. When shortfalls first began to appear, many endowment borrowers were advised not to top up their policies, but to put extra cash aside in an ISA. These may well now be facing shortfalls on their shortfall funds.

Now don't laugh. But apparently, on Friday, Lord Penrose said he hoped to deliver the report into the inquiry about Equitable Life by next summer. Good luck to him. If he can report by the summer, there will be cheering all round. But he's hardly begun his first round of interviews. After that, key witnesses return to make a formal statement, then there is a huge and no doubt contentious report to produce. And then there is the so-called "Maxwellisation" process - those named therein get a preview, a right to reply, as do their lawyers.

Parliament is losing its patience. There was a very sparky adjournment debate in the Commons last week, when MPs of all parties called for a full independent inquiry to be completed. With this in mind the Treasury Select Committee has decided not to wait for Penrose's report, before resuming its own inquiries. In the new year they plan to hold further public hearings, calling witnesses in to give evidence, including Penrose himself.

At least the Treasury Select Committee has a record of doing as it says it will.