Lloyds Banking Group attracted criticism last week after it inadvertently revealed that one of its lowest advertised mortgage rates is intended as "a conversation starter" rather than a popular deal.

The controversy centres on a 2.99% two-year fixed rate mortgage deal that was launched by Lloyds Banking Group company Halifax in September and by Lloyds TSB on 1st October. The low interest rate is heavily publicised in branches, but thanks to the deal's high deposit requirement (40 per cent of property value) and a virtually prohibitive 2.5 per cent arrangement fee, Lloyds concedes that the deal really "isn't suitable for everyone".

Lloyds' intentions came to light when a letter intended for branch staff went public.  In it, the banking group advises staff to start a conversation with potential mortgage customers along the lines of "we have a great range of fixed-range mortgages starting from as low as 2.99 per cent".

The first problem is that so few customers will qualify.  Less than a quarter of borrowers will meet the product's maximum 60 per cent loan to value requirement.

The second problem is that even fewer of those will want to pay the high arrangement fee for the benefit of two years' fixed low interest.  For somebody applying for the average mortgage amount of around £110,000 in August 2009, the fee of 2.5 per cent of the mortgage advance comes to £2,750.

Even if you're buying the average house (around £160,000) and have to raise just half of the purchase price through a mortgage (i.e. £80,000), that fee would still amount to an eye-watering £2,000. 

No wonder Lloyds staff in practice end up steering applicants towards other products.  At the same loan to value level, customers could opt to pay only 0.2% more interest with a £995 fee on a 2-year tracker.

Their spokesman defended the principle of issuing deals purely as eye candy, saying: "As a relationship-focused bank it is natural for our colleagues to want to discuss with our customers the range of products available to them".

However, we can't see many borrowers getting drawn too far into that sort of conversation when, for example, a stroll around the corner to a branch of Northern rock would reveal a fixed-rate deal for purchasers that would cost them an extra 0.76% in interest but with a fee of £595.

What do you think – is Lloyds clever to introduce rates mainly for eye candy, or is that a bit cynical?

I think it's safe to say that Halifax will be glad to see the back of this particular mortgage deal.

In 2007, the nation's biggest mortgage lender was offering a two-year tracker mortgage at 0.51% less than the base rate.

That means that since April this year, approximately 7,500 borrowers on that deal have been paying zero interest.

Zero! And that's on top of three or four months leading up to April where the base rate was declining rapidly; by contrast, at the same time Halifax would have been paying unusually high premiums on inter-bank borrowing during the same period.

Sadly for those mortgage-holders—and gladly for the now state-owned (via Lloyds Banking Group) Halifax—the deal has now just about timed out. November will mark the two-year anniversary since the last -0.51% tracker was withdrawn.

Technically, borrowers should have been owed 0.01% interest, but in practice the calculation was just ignored and borrowers repaid only the capital.  These borrowers now face a sudden jump in repayments as they revert to Halifax's SVR of 3.5 per cent.  However, Halifax is believed to be offering the a 0.51% discount on this rate if they sign up to a discounted deal for two years (i.e. with tie-ins).

Tracker mortgages today 

The picture for trackers now is (as you'd expect) very different: positive margins of three per cent are commonplace.  Of course, a lot has changed in those two years, and few predicted that those base rate changes would arrive at such a rate.

Which makes us wonder: in two years' time, what will repayments be like for those paying three per cent above base rate?

Food for thought!

Chancellor's temporary raising of Stamp Duty threshold has helped 112,000 homebuyers

Halifax, the UK's biggest mortgage lender and part of the Lloyds Banking Group, has released research figures showing that 31% of homebuyers have been able to duck under the Stamp Duty threshold in the ten months between September 2008 and June 2009.

The figure represents 112,000 homebuyers who were buying houses priced between £125,000 (the normal threshold) and £175,000 (the current threshold, temporarily increased to ease up pressures on the housing market).

For first time buyers (the group clearly intended to benefit most from the temporary measure), pushing the threshold up to £175,000 has had the most pronounced impact outside the south-east.  Consider that in Greater London only 34% of first time buyer purchases came in under the threshold, whereas in all the other regions combined the figure was 63%.

All this is great news for the market, but it does make us pause to think how it will be received by buyers if (or when) the threshold comes back down again.

What's more, it makes us ask two questions about Stamp Duty in the first place:

1. Should this tax (and it is a tax) apply to first time buyers at all?
2. Should Stamp Duty thresholds really be calculated on as raw a measure as the purchase price, since prices vary so widely between regions?

. . . and Lloyds, Barclays and Abbey aren't far behind.

As promised in Spring, the Financial Ombudsman Service (FOS) has just released its "name and shame" list of banks and financial institutions based on how well they resolve customer complaints.

The list tallies only the cases referred to the Financial Ombudsman Service, not total complaints to an institution.  FOS referrals are situations where a customer wasn't happy with the response to their complaint, and there's a wide variance in the numbers of complaints that the FOS upheld on the customer's behalf.  For this reason, the list makes interesting reading for mortgage lenders and borrowers alike.

We'll focus on: 

1. figures for mortgage complaints only—not banking, pensions or insurance;
2. percentages of cases upheld by the FOS, not the overall number of cases (since this depends on the size of the institution, amongs other things).

First thing to note: the industry average for mortgage-related cases is 41 per cent resolved in favour of the customer.  That means that in nearly six out of ten customer complaints, the FOS thought the lender was in the right.  That's not bad for the industry as a whole, compared to the percentages for banking and credit (61%) and insurance (70%). For figures like these, remember lowest means best.

So, who scored worse than average?

GMAC-RFC scored badly on the mortgages list: 75 per cent of complaints to the Ombudsman were upheld.  This typically means that in 3 out of 4 cases the Ombudsman judged that they had either sold the borrower the wrong product, charged them unfairly or done something else that left their customer out of pocket. In each of these cases, restoration means putting the customer back to the position they were in beforehand—for example, repaying charges or interest and moving them to the deal they should have qualified for in the first place.

That 75% figure puts GMAC out in front by quite a long way.  Any comments would be welcome as to why you think this is :)

GE Money (61%) and Preferred Mortgages (58%) came in second and fourth on the list, but they're mingling with three High Street lenders who won't be at all pleased to appear in such company: Lloyds (58%), Barclays (55%) and Abbey (52%).

The only High Street lender to look good out of all of this is Nationwide, whose figure of 28% is lowest on the chart.  However: there are many other lenders who don't chart at all because they had fewer than 30 complaints in the six-month period.  This includes most of the building societies (Skipton, Yorkshire, West Bromwich among them) and some even more surprising omissions: for example, Halifax isn't on the list at all.  Surely some people must have complained about the UK's biggest mortgage lender?

Let us know what you think — especially if you're as unsurprised as we are to see GMAC up there!