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Last Updated: Tuesday, 9 December, 2003, 07:44 GMT
Q&A: Longer-term mortgage review
For sale signs
UK Housing market is a national obsession

An anxiously awaited review into whether UK homeowners should be encouraged to take out longer-term mortgages has been published by the Treasury. BBC News Online examines the report's findings - and what it could mean for UK homeowners.

What is it?

In April's Budget, the Chancellor announced a review into long-term fixed-rate mortgages and why they are not as popular in Britain, as they are in the US and Europe.

The review has been conducted by David Miles, professor of finance at Imperial College, London.

The interim findings have been published to coincide with the pre-Budget report, with the full report and recommendations to be announced in the next Budget in 2004.

So what's the big deal?

As many as 70% of homeowners in the UK have a variable rate deal.

This makes most mortgage borrowers vulnerable to changes in interest rates.

The Chancellor believes the low take-up of longer-term fixed rate mortgages could be one reason for the boom and bust cycle of the UK housing market.

He wants to avoid a repeat of the problem which arose when the UK joined the ERM in the early 1990s and the country plunged into a recession.

How different is the UK mortgage market to the US and Europe?

The UK housing market is very different to the continental and US housing markets.

Terms of reference
What is limiting the growth of the fixed rate mortgage market in the UK?
Why is the share of fixed-rate mortgages so low compared to the United States and many other EU countries?
Has there been any market failure that has held back the market for fixed and long-term fixed rate mortgages?
What are the opportunities, risks and potential costs for more longer-term fixed deals
British homebuyers tend to prefer cheap short-term discounted or fixed -rate deals, or variable rates which move up and down according to the Bank of England base rate.

In contrast, the US and European mortgage markets are much more dominated by longer-term fixed-rate deals.

For example, of the new mortgages taken out this year in the UK, 59% of loans were variable rate deals.

On the continent only 35% were variable and 65% were fixed rate.

Almost half or 28% of those fixed-rates were for periods of more than five years, according to data from the European Mortgage Federation.

What does Professor Miles conclude?

The 124-page report found that the growing popularity amongst the public for short term fixed rate deals made sense.

Short term fixed rate mortgages were often sold at or just above the lender's own borrowing cost.

Professor Miles concluded that long-term fixed rates appeared expensive when compared to short term fixed deals.

But the biggest losers according to the report are those on a standard variable rate deal.

Margins on the typical standard variable rate mortgage were much higher, priced on average at 1.79 percentage points above the bank's borrowing cost.

In effect, Professor Miles said, the financial literate are cross-subsidised by those who choose not to, or cannot, shop around. Many borrowers, he said, were unaware of just how much these subsidies cost them.

According to the report, any individual bank which removed upfront discounts would probably lose market share, hence there is no incentive for any mortgage provider to deviate from the dominant price structure in the market.

All in all, Professor Miles concludes that there is no collusion between UK lenders to rip-off standard variable rate customers.

What next for my mortgage?

Prior to the report there were suggestions that to make long-term products more attractive, the government could promise to bail out mortgage lenders if they get into difficulties or provide tax incentives.

But either option would incur costs that would have to be met with taxpayers' money, - at a time when the government facing a black hole in its finances.

Professor Miles prefers to take a softly-softly approach and will talk to Financial Services Authority and the Office of Fair Trading about which steps to be taken to improve the functioning of the market.

But even if the UK moves to continental style fixed mortgage marketplace it is unlikely to guarantee an end to housing market boom and bust.

In countries such as the Netherlands and Spain, where fixed loans are the norm, there has also been a pronounced house price booms in recent years.

What are the long-term ramifications?

The ramifications of the report could lead to big changes for the UK's 11.4m mortgages - and the way we buy and sell houses.


Longer-term fixed-rate deals may knock some sense into the UK housing market's runaway house prices.

It may help households to budget, because they would know what their mortgage payments were for many years ahead.

But for "rate tarts" who like to transfer their deal every few years, there could be fewer special deals around.

Longer-term fixed-rate mortgages tend to be more expensive than short-term deals.

But with most UK homebuyers not into rate swapping, they may benefit in the long run.

What about house prices?

The main idea behind introducing long-term fixed-rate mortgages is that it could stabilise the UK's topsy-turvy housing market.

Homebuyers should not fret, though.

Any changes are a long way off, and it is unlikely to have any effect in the short-term.

And some continental countries have still had house price booms despite fixed rates.

Anything else?

Another Treasury-backed report into the housing market is expected on Wednesday.

Kate Barker, a member of the Bank of England's Monetary Policy Committee, has been looking at the issue of housing supply.

She is expected to recommend that more social housing is needed, along with measures to speed up building and planning.

It is thought it may recommend tax credits for developers who build on brownfield sites, and possibly development taxes on developers who hold idle greenfield sites.

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