Faint hope for home income plan victims: A legal loophole could rescue some from repossession. Vivien Goldsmith reports

A LAWYER working with borrowers whose home income plans have turned sour believes he may have found a loophole that would allow those with deferred-interest mortgages to escape repossession, if not the growing rolled-up debt.

Paul McDonnell-Staff, an Australian working with the solicitors Trethowans of Salisbury, Wiltshire, is defending 20 cases where elderly people are threatened with losing their homes through mortgage interest being rolled up into the loan. They are unable to pay any interest and the loans are advancing towards the value of the properties.

He says the rolled-up element of the loan should be looked on as a separate agreement from the initial mortgage, and comes under the Consumer Credit Act. This means it should have added safeguards such as a cooling-off period. This would not have been offered to borrowers as the lenders do not accept this view of the agreement.

Mr McDonnell-Staff admits that the argument only stands a 50/50 chance of winning in the courts. But he aims to try.

He admits that in some limited circumstances these deferred loans could have been properly sold. Trainee solicitors or doctors who were pretty certain of a large jump in salary on qualification would typically be held suitable for these mortgages, where the payment rate lags the real rate of interest and the underpayment is added to the loan.

But he has been approached by dozens of borrowers, not all of whom fall into any suitable catagory, asking for help. One is a carpenter and shopfitter who had no realistic hope of a rise in his income.

Jonathan Wallington bought a flat in Wandsworth, London, at the top of the market - the day before dual tax relief was withdrawn in 1988. A year later he remortgaged with UCB. This involved releasing pounds 8,000 of capital and taking on a five-year loan fixed at 12.5 per cent, with pounds 2,000 a year being added to the loan each year for the five years to make up for lower interest payments.

'I don't believe I was screened,' says Mr Wallington, who had left the army and now runs his own mobile advertising company. 'It seemed like a no-lose deal. I would have cash in my pocket and lower payments. I tried to be slightly clever.'

He inquired recently about the cost of unravelling the deal, which still has one year to run, and was told it would be pounds 6,000. 'That's ridiculous. I would be happy just to sit around a table and find a way around this. I have a large negative equity on the property, and have suffered hardship.

'I don't want to sound like Mr and Mrs Angry. I admit that if interest rates had gone the other way and were now 30 per cent, I would not be complaining. I'm a fair person, but. . .'

Roy Battison, a director of UCB Home Loans, said: 'Most people knew exactly what they were doing. It's not like little old ladies and home income plans. You don't get something for nothing. Many of these customers have my sympathy, but they were valid transactions.'

He said that UCB would terminate these arrangements by charging the difference between the agreed fixed rate and the current fixed rate for the remaining life of the loan.

Allied Dunbar still runs mortgage schemes that allow borrowers to pay interest at below the rate charged.

Bill Vasilieff, divisional director of product marketing for Allied Dunbar, said: 'There is a lot of unfair comment about deferred mortgages. It is something that clients got into knowing exactly what they were doing.

'It's like those on fixed rates who want to get out when rates fall. But most people accept it.'