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Last Updated: Friday, 12 March, 2004, 09:16 GMT
Q&A: Long-term mortgage review
A semi-detached house

An eagerly 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 Miles report and explains what it could mean for UK homeowners.

What is it?

In the 2003 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.

What did Professor Miles conclude?

The 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.

What should be done?

Professor Miles said that borrowers should be presented with 'what if' scenarios showing how much choosing a variable-rate or fixed-rate deal would cost them over the life of their mortgage.

But most importantly for UK homeowners, the review said that lenders should offer the same deal to new and existing borrowers.

To help encourage people to become more active consumers, Professor Miles said mortgage lenders should inform their customers about all the rates they offer at least once a year.

So can I tell my lender that I want to switch to a cheaper mortgage that at present they only offer new customers?

Unfortunately, you are unlikely to be allowed to switch.

Although Professor Miles recommends that lenders ought to offer their best rates to all borrowers, he fails to outline how this should be achieved.

Unless the mortgage industry volunteers to change its practices then the government may be need to introduce legislation.

Legislation would take time and there are bound to be some mortgage lenders that are happy with the status quo.

So why are we worried about too few long-term mortgages?

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.

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.

See how the UK housing market measures up

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 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.




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