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Last Updated: Friday, 12 March 2004, 16:59 GMT
Call for 'fairer' mortgage deals
MILES REPORT IN FULL
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The UK Mortgage Market: Taking a Longer Term View - Final Report and Recommendations
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Mortgage lenders should be required to offer existing customers the cheaper deals they give to new customers, a Treasury-commissioned report has said.

The Miles report looked at ways to encourage more long-term mortgages to stabilise the UK housing market.

At present, most UK home buyers are ignoring the benefits to be had from long-term fixed rate mortgages.

Instead, they look for the low initial repayments, even if the interest rate rises after a couple of years.

The report's key recommendation for many homeowners will be that lenders make their full range of mortgage products available to all borrowers.

This could provide borrowers with considerable savings.

The plan was broadly welcomed by the mortgage industry.

The Council of Mortgage Lenders said that " the recommendations provide a sensible package of measures that would, taken together, generate improvements in the UK mortgage market."

Variable rate rip-off?

According to the report the typical standard variable rate mortgage was priced at an average of 1.79 percentage points above the bank's borrowing cost.

In contrast, many short term fixed rate deals available exclusively to new borrowers were sold at cost or even a slight loss.

In many ways the UK mortgage market works well. It is a dynamic and innovative market
Professor David Miles

However, the report by Professor David Miles of Imperial College London makes no recommendations as to how mortgage lenders can be compelled to offer the same deal to new and existing borrowers.

"If Miles' recommendations are adopted, perhaps through legislation, we will see a levelling out in the price of mortgages offered to new and existing customers," David Bitner, head of product operations at Bradford and Bingley Marketplace said.

Peaks and troughs

The Miles report was commissioned by UK Chancellor Gordon Brown to examine why long-term fixed rate mortgages are so unpopular in the UK.

See how the UK housing market measures up

Even though they are common in the US and continental Europe, they account for less than 5% of UK home loans.

The chancellor is convinced that house price swings pose a major threat to the nation's economic well-being and sees the greater use of fixed rate deals as a way of smoothing out market peaks and troughs.

The interim findings of Professor Miles were published last December.

He found that lenders were subsidising cut-price deals offered to new customers through their existing borrowers.

"In many ways the UK mortgage market works well. It is a dynamic and innovative market, " he said.

"This report makes recommendations to address problems that exist in the information and advice that borrowers receive, in the structure of pricing of mortgages and in the funding of fixed-rate mortgages."

Discount drawback

The drawback to discounted products is that they have to be paid for by borrowers on a standard variable rate, on which margins are much higher.

Miles key recommendations
Lenders make their full range of mortgage products available to all borrowers but no recommendations as to how this is to be achieved
Consumers to be presented with 'what if' scenarios by mortgage advisers indicating the interest payable through fixed rate and variable deals
Lenders include, with annual statements, a leaflet setting out the current mortgage rates on all their products.
Consumers should be able to take out insurance to cover increases in their monthly mortgage repayments if interest rates rise sharply.

In effect, Professor Miles said, the financially 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.

But he concluded that the market was very competitive and there was no suggestion of price collusion by mortgage firms.

Professor Miles said that better information and consumer advice was needed to encourage the supply and take-up of more long term mortgages.

In addition, it should be easier for mortgage firms to offer long term fixed deals, up to 25 years.


Your comments:

Some banks will offer the same deals to existing customers but they keep quiet about it. I have been with Cheltenham and Gloucester for several years and when one fixed rate comes to an end I just phone them up and they put me on a new one.
Tim Sowter, England

I've just finished a longer term (5 year) fixed rate mortage package and am out of pocket to the tune of about 2000
C Adam, Stirling UK
I've just finished a longer term (5 year) fixed rate mortgage package and am out of pocket to the tune of about 2000 over the period compared with sticking with the standard variable rate. Obviously interest rates could well have gone up within the period and I would have saved money, but they didn't. I can't see why, with interest rates fluctuating that I would consider a 25 year fixed rate. No one has a crystal ball and therefore the riskier short term fixed/discounted rate is a better bet for me. Currently a 140k 2 year fixed rate will cost you about 80 a month more than other discounted products available. As the fixed term increases the differential gets bigger. Not worth it in my view.
C Adam, Stirling UK

Let me get this straight. Banks are going to introduce a fairer mortgage system that offers buyers lower repayments over the longer term? After every bank posting record profits (despite surprisingly low interest rates!) one can only figure it is the property market and the margins of interest charged that is driving their profits. Why should banks actually bother to encourage better, cheaper borrowing?
Ross, London, UK

Long term fixed rate mortgages are unpopular in the UK because banks are permitted to charge very large mortgage redemption charges if the mortgage is redeemed early. Such charges are not legal in either the USA or in most countries in Europe. Fixed rates are popular with consumers only in those countries where they are not "locked-in" in the event that interest rates move substantially lower than their borrowing rate.
CPF, UK

I have always found it insidious that existing borrowers are not offered the same rates as new ones. It simply does not engender loyalty, I feel they are taking advantage of inertia at their peril as the Internet opens up borrowing advice to vast numbers of borrowers
Gavin Croucher, Hungerford Berkshire

The problem... is that borrowing prices are broadly the same regardless of how good (or bad) a credit risk you are
Jerry, London, England
The problem with the UK mortgage market is that borrowing prices are broadly the same regardless of how good (or bad) a credit risk you are as an individual. People who are smarter about the way they manage risk and their household income and that have strong career earnings profiles pay the same as those who are happy to plunge into unreasonable levels of personal debt. That is wrong and would not be tolerated in any other area of banking. To that end the market is wholly inefficient.
Jerry, London, England

A fixed-rate mortgage over a long term is only good if one expects to stay in the same place for a significant part of the term. Given that there is a rate penalty to be paid when opting for fixed over variable rate, it may be far cheaper to opt for the short-term variable rate deals every time one moves house. However, if it was made possible to transfer security from one property to another (i.e. keep the same mortgage and move house) then longer fixed-rate mortgages might become more popular, especially if the terms made it possible to increase the amount borrowed on the mortgage at the same rate as the original.
Dave, Cambridge UK

The housing market has always been boom and bust. Nothing can change that. Greed and sentiment drive the market. It's not possible to control the illogical manner of human nature.
Andrew Harris, Birmingham, UK

We live in an ever changing world and clients enjoy the flexibility of being able to remortgage every 2 to 3 years to meet their changing circumstances and also depending upon the conditions of the economy. Who wants to select a fixed rate mortgage for the next 25 years when they do not know their circumstances in 12 months time?
Marc d'Espagnac, Bournemouth, UK

Most long-term fixed rates have strong penalties if you withdraw
Ed Manning, Coventry, UK
I have friends who several years ago went for a long-term fixed rate mortgage with the Natwest. At the time it appeared to be a good deal, but soon mortgage rates dropped and they were left tied in to far higher rates than anyone else was paying. Most long-term fixed rates have strong penalties if you withdraw. People want to be able to have low long-term fixed rates, without the penalties then people would feel happier taking them.
Ed Manning, Coventry, UK

I searched over 10,000 mortgages a year ago and very few were even offering long term mortgage rates, especially 10yrs+ ones and let alone reasonable rated ones. In the end I opted for 4.75% fixed for 5 years but my friend in France got 3.75% fixed for 25 yrs!, i.e. the full term. It's rip off Britain all over again.
Trevor, Widnes, Cheshire

If you want to make things fairer why not remove the tax break people which buy-to-let owners get. Make them pay tax on all the income they own not just that over the interest they incur and stop there being a bubble in the first place. Then worry about long term fixed rates.
Ben Shepherd, Farnham, Surrey

Surely the interest paid over the life of the mortgage is enough for banks and building societies to absorb the costs themselves
Steve Vasey, Spennymoor

I am a firm believer in long term fixed rates, but these products are usually rendered too expensive because of early repayment penalties, and high up-front charges such as application fees, valuation fees, etc. This could be as high as 1,000 in total which could put people off. Surely the interest paid over the life of the mortgage is enough for banks and building societies to absorb the costs themselves, or is this another ploy by the big lenders to make even more profit at the borrowing public's expense.
Steve Vasey, Spennymoor, England

My colleague approached his bank to say he was remortgaging with another company advertising a special offer and his bank matched the deal rather than lose his business. If you don't ask you don't get!
Ailsa, UK

25 year mortgages are a great idea when interest rates fluctuate in a narrow band, but when there is a step change in rates as has happened recently, the consumer can get slaughtered. A 25 year fixed rate taken out 15 years ago would still be charging in excess of 10% - as my 10-year fixed deal would have been doing if I hadn't paid the high redemption penalty.
Jonathan, Sandbach, UK

I don't think long term fixed rate mortgages will ever take off in this country. First time buyers are unlikely to have the option to go for this type of mortgage because you can get such good discounted rates. And for the rest of us, why pin ourselves down to a single lender for 25 years when you can remortgage every two years and benefit from the competition between lenders?
Andy, UK

They lend me money, I pay it back. Simple.
James Hayward, UK

The largest problem is the tie-ins that go with fixed rate deals. I recently signed a 3 year fixed rate deal that costs a huge amount of money to get out of if I should move in the next 3 years. I would have liked to have had a longer deal but the get out clauses were prohibitive.
Paul Darken, Liverpool, UK



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