Borrowers absorb lender's losses: Home owners are paying a penalty for someone else's failure, writes Maria Scott

SUE AND Douglas Priest are having to foot part of the bill for the pounds 86m half-year loss announced by the specialist mortgage lender National Home Loans.

Their experience is a lesson for anyone who thinks that you cannot lose out to a financial institution if you owe it money, rather than vice versa.

Mr and Mrs Priest remortgaged their home in Maidstone, Kent, with National Home Loans in 1989, raising a loan of pounds 90,000 on the five-bedroom semi-detached house. They previously had a pounds 45,000 loan from Nationwide Building Society but wanted to double this to take advantage of some of the profit on the house. At the time, it was worth an estimated pounds 140,000. The building society would not increase the mortgage by this amount, but a broker raised the money for them from NHL.

When the Priests took out their loan the interest rate was 14.25 per cent, one percentage point above the typical building society rate at the time. The couple went into it with their eyes open, knowing they had to pay slightly over the odds to obtain the loan they wanted.

'If it was still only 1 per cent over the average we could understand. But it is now 2 per cent and not coming down,' Mrs Priest complains.

'We started with payments of pounds 1,030.20 a month. Over the next year, as the interest rate rose so did our payments, to a high of pounds 1,175.44 at 16.45 per cent.' At one point, Mr and Mrs Priest were both unemployed and missed two payments, though they quickly paid these off in a lump sum. Both are now working - Mr Priest is a driving instructor and Mrs Priest is a teacher.

They have kept up their payments since settling the arrears, but are dismayed that their mortgage rate has not come down since last September despite two cuts in the base rate since then. In September last year their monthly payments came down from pounds 957 a month to pounds 889.

'We are still paying the inflated interest rates asked for by this firm, at present 12.65 per cent,' says Mrs Priest.

Most mainstream lenders are offering discounts on loans over pounds 60,000 so that borrowers are paying little more than 10 per cent. There are fixed- and capped-rate deals available at rates of less than 10 per cent.

But the Priests are trapped. With a joint income of pounds 28,000 they do not qualify for a mortgage with a mainstream lender at present.

'This is so frustrating, because we have kept up payments on a mortgage of pounds 90,000 at an interest rate about 2 per cent higher than building societies are charging,' complains Mrs Priest.

NHL confirms that its rate of 12.65 per cent is what it charges people who remortgage with it. Those who took out fresh mortgages with the company are paying slightly less at 12.15 per cent.

Perhaps the only consolation for Mr and Mrs Priest is that they could be even worse off. National Home Loans charges people in arrears one percentage point more than it does borrowers with a clean record.

The company is unrepentant about its policy.

NHL is one of several specialist mortgage lenders set up in the 1980s to exploit the boom in the UK mortgage market. These companies fund their mortgage lending from the wholesale money markets, unlike building societies, which rely mostly on savers' deposits. In the last three years savers' deposits have been a cheaper source of funding than wholesale money market funds. This has meant that most societies have offered cheaper loans than specialist lenders.

But NHL's rates have been put under further pressure by its financial problems.

Last November the company announced a loss of nearly pounds 48m for the year to September 1991 after bad debt provisions of pounds 88m. Last month it negotiated a deal with banks to refinance its pounds 540m debt.

A spokesman for the company said this week: 'We are not keeping the rate high out of choice.

'Until our situation improves we simply do not have the room for manoeuvre.'

He said NHL had refinanced itself and needed to maintain its mortgage rates at a certain level to cover that.

(Photograph omitted)