With Housing being top of the political agenda, currently, Prime Minister Gordon Brown has planned to provide more long- term, fixed rate mortgage deals as an important measure to control the potential affordability problems.
It was in fact, Mr Brown, as chancellor in 2003, asked Professor David Miles to report on why there were not very many long- term, fixed- rate mortgage deals available on Britains market. Mr Brown had said that if there were more of these deals around they would help to iron out the problems with the volatile property market.
In 2004, Professor Miles did seem to agree with the idea that more long- term borrowing would be a better thing but only if it could be made cheaper.
Mr Brown does still wish to make fixed- rate deals more commonly available with house prices on the increase and the ever- increasing problem that first time buyers are faced with. Industry experts are not sure that Mr. Brown’s solution will work as expected.
Mr Brown wants to make it possible for banks and building societies to borrow more money from the financial market. Formally known as covered bonds, the theory behind these is actually quite simple. The bonds are basically a more complex version of I.O.U’s, these are issued by companies and the government as an alternative to putting up taxes or borrowing from a bank. A covered bonds eventual repayment is secured by a mortgage. The bonds can be issued directly by the lenders (banks or building societies), by companies, or the government. The bonds back their own lending having been bought by the lender.
The Governments subtle idea to effectively increase the availability of covered bonds, that can then be used to finance long term mortgages can be offered to the public. Another idea is to allow building societies to gain more money in the financial markets to improve their ability to lend. This would also bring
Therefore, this should allow house buyers to borrow more money from the lenders in the form of 15 to 25 year mortgage products.
It has not been obvious as to how these plans for longer term deals will, in fact solve the house price situation. The reaction from the industry experts is showing a certain amount of scepticism. The overall benefit for consumers for long- term, fixed- rate mortgages is not quite known. These deals have been unpopular in the past due to interest rates on the mortgages being substantially high.
It seems people in
According to the Council for Mortgage Lenders, mortgages that are fixed for five years or more account for 8- 10% of new mortgage lending. Only 25 lenders offer a 10 year deal, four lenders offer a 15 year deal, two offering a 20 year deal, three offering a 25 year deal and only one offering a 30 year fixed rate deal. This is quite a contradiction when compared to the
However, making these long- term, fixed- rate deals commonly available on the market will not necessarily mean consumers are more likely to ask for them. The consumer’s appetite for these deals is just as important as how these deals are funded. These changes are in their infancy and it is too early to say whether there will be a shift in the market to the long- term deals.
With interest rates on the rise customers have been seen to choose fixed rate deals, in the past year, as borrowers have sought to protect themselves, against possible increases.
Fixed- rate deals are currently used by 89% of first time buyers and 73% of homeowners that have moved. In total, almost half of mortgage deals are fixed rate in one shape or another, however, most being of the two- four year variety.
It seems at the moment homeowners are unlikely to commit to a long term mortgages, they normally consist of 5 years, let alone 25 years.
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