The government has published a wide-ranging review of the UK mortgage market. This report could lead to more long-term fixed-rate loans and fewer short-term bargains.
Today, David Miles, Professor of Finance at Imperial College, London, published his long-awaited report into the UK mortgage market. This is timed to coincide with the chancellor's pre-Budget report, which Gordon Brown will deliver tomorrow (watch this space!).
The government is worried that the UK's notoriously volatile housing market may threaten future economic stability. In order to put the brakes on the stop-go housing cycle, it has been looking into ways to encourage mortgage borrowers to borrow on long-term fixed rates. Read more here.
The UK is very different to many other developed nations, because the majority of our home loans - close to two-thirds (63%) - are on variable-rate deals. That means that most British homeowners are at the mercy of the Bank of England's Monetary Policy Committee and the roller coaster of fluctuating interest rates (Excel file).
In the US and on the Continent, borrowers prefer the security and peace of mind that long-term fixed rates offer. For example, in Germany, home loans are all fixed over five to thirty years, with variable-rate deals almost unheard of. In France, six out of seven home loans are at fixed interest rates. Across the Continent as a whole, nearly two-thirds of mortgages (65%) are fixed-rate deals, with half of those fixed for more than five years.
A few daring lenders have tried marketing 25-year fixed-rate mortgages in the UK, but with little success. Currently, the Cheshire BS and Leeds & Holbeck BS both offer 25-year fixes, at rates of 5.78% and 5.99% respectively, but precious few borrowers go for these deals.
Here are the key findings of Professor Miles' report:
- In the UK, long-term fixed rates appear expensive, when compared with short-term deals. British borrowers are more interested in low initial repayments, rather than long-term value for money.
- Short-term fixed-rate loans and discounted-rate deals have very low margins - at or barely above lenders' own borrowing costs.
- The highest-priced loans are standard variable rate deals, with margins of almost 1.8 percentage points over lenders' borrowing costs. Often, these borrowers have no idea that they are paying well over the odds.
- Professor Miles reveals that, by paying higher rates, financially uninformed borrowers are subsidising those who do shop around.
- Finally, he concludes that UK lenders are not colluding to rip off standard variable rate borrowers.
I disagree with the learned Professor on the last point. As this article shows, eight of the UK's ten biggest mortgage lenders (these ten account for around four-fifths of all home loans) appear to be operating a lucrative little cartel. With the notable exception of HSBC
(LSE: HSBA)
and Nationwide BS, all charge between 5.74% and 5.84% - that's a spread of just 0.1% percentage points!
It remains to be seen what effect Professor Miles' report will have for the UK's 11½ million mortgage borrowers - and for homeowners-to-be. However, with government finances looking shaky, don't expect tax breaks for long-term fixed-rate mortgages just yet. Still, at least better long-term fixed rates would make it easier for homeowners to budget, because we'd know what our mortgage repayments would be for many years in advance.
Even if the government does introduce new legislation or make structural changes to housing finance, it may not stop the 'boom and bust' housing cycle. After all, house prices have boomed in Holland and Spain in recent years, yet the mortgage markets of both countries are dominated by fixed-rate loans.
As things stand at the moment, our advice is to stick to being a 'rate tart' by shopping around for a better home loan whenever you can. Start by reading our wonderful guide to remortgaging, which was written by yours truly!
More: Visit our Mortgage Centre | Getting Fixed For 25 Years | A Simpler, Stronger Housing Market | When The Cheapest Mortgage Isn't The Best.
