Are mortgages designed to confuse customers?

If any further evidence were needed that mortgages are over-complicated, new research from Which? seems to have settled the case. When Which? presented a bundle of borrowers with a selection of two-year fixed rate deals, only 3% were able to put them in the right order in terms of good value. That means that left to their own devices, 97% of people would pay too much for their mortgage - an astonishing fact.

It's not hard to see why. Twenty years ago, finding the best mortgage was simply a matter of uncovering who had the best interest rate. Of course back then, without internet in every home, this wasn't quite as easy as it is today. But for canny borrowers, there were tables printed in the back of newspapers which could give you an idea as to who was offering what.

In reality, most people didn't even bother looking through the saturday supplements for a good mortgage. Instead, they either walked into a few bank branches on their high street, or simply handed over their affairs to a mortgage broker - leaving them to do the hard work.

Fees take over

But as the housing boom took off, competition in the mortgage market became intense. As with every market, once competition drives headline prices down, companies quickly switch their attention to how they can make money in additional fees and charges. According to Which?, there are now more than 40 different fees that your lender might hit you with, meaning that the interest rate is merely a small part of the story.

Investment banks also had their part to play in the way the UK lending market evolved. By packaging up mortgages and selling them off as investments, investment banks fuelled competition in the market - allowing small lenders, such as Northern Rock, to take on large swathes of new business, safe in the knowledge that they would be able to sell their liabilities on within a matter of weeks. For the Northern Rocks of this world, the fees and charges became the way they made their money. The rate was entirely secondary.

Time for intervention

It's hard to see how we can roll back from here without some regulatory intervention. Which? rightly calls on the government to come up with a way of helping people compare the total cost of mortgages - and says companies should be forced to adopt this. The difficulty is that this won't catch all fees. Of the 40 or so charges that some lenders levy, many will never be paid by the majority of borrowers. But they sit waiting as a trap for the minority who deviate from the normal course. Which?'s answer here is to force lenders to peg all additional fees to costs, meaning post-purchase fees would be proportionate, and not a means of bolstering profits.

These are significant and intrusive remedies - which may well be part of the right solution. However, I'd suggest that the next step should be for a full Competition & Markets Authority inquiry. What clearer evidence do we need that a market is failing than the fact that 97% of customers can't pick the best deal? Which? has the power to force the CMA to look at failing markets - and should consider using its super-complaint powers here to get this important issue on the agenda.