The loan market has been scathing about Chancellor Alistair Darling’s proposals to boost the supply of long-term fixes, reports Tanya Powley After just two weeks in his new role as Chancellor, Alistair Darling has got the mortgage industry up in arms with his announcement that the Government will boost the supply of long-term fixed-rate products amid concerns that lenders are only offering short-term fixes so they can rake in high arrangement fees.
Darling also hit out at mortgage brokers, claiming that they also have inbuilt incentives to advise borrowers to take short-term products. He said: “Brokers want you to come back every two years rather than every 10 or 20 years.”
Prime Minister Gordon Brown told Parliament that Darling will start to consult on creating a new regime for covered bonds which will help lenders finance more affordable 20-25-year fixed-rate mortgages.
Brown said there would be legislative proposals for a covered bond regime in the UK to assist mortgage firms to finance their lending over the longer term. The proposals will enable firms to take advantage of the special status that these bonds will be given, which will give lenders greater opportunity to participate in the covered bonds market.
But brokers have slammed the Government’s proposals, with many saying that Darling does not seem to know what he is talking about.
John Charcol senior technical manager Ray Boulger says: “A lot of his comments seem like he has not done his homework on the mortgage market. There are a lot of 10, 15 and 20-year products and three lenders are offering 25 years. The reason why there is only three lenders offering this is because there is no demand.”
The Mortgage Practitioner sole practitioner Danny Lovey points out that he could lay himself open to “unsuitable advice” for most cases if he recommended a 25 year-fixed-rate product.
He says: “Put simply, 25 years is an awful long time and much can and will change. It is often difficult to see down the line past two years to five years so why would you want to fix yourself into a deal when the average homeowner moves about every six years?
“Clients are demanding two-year products and that is why we are doing them. Rarely do I have anyone want to go longer than five years because of the changes in the market and their lives.”
Three years ago, the Treasury commissioned a review from economist Professor David Miles into Britain’s lack of long-term fixed-rate mortgages.
Boulger points out that nothing was done after the results of the review were announced, saying that the Government just filed it away.
Hamptons technical director Jonathan Cornell says: “While I am sure that the new Chancellor means well, I think he is flogging a dead horse. Professor Miles spent a long time investigating long-term fixed rates and, despite brave attempts from a couple of lenders, very few long-term fixed rates were sold. I do not believe that the only reason why brokers sell short-term rates is to maintain their opportunity to remortgage clients in a couple of years.”
Proof that Darling may not be familiar with the mortgage landscape is highlighted in research by Moneyfacts.co.uk. Analyst Lisa Taylor points out that there are 141 products offering a fixed rate of 10 years or more on the market already. So the products are out there but it is down to whether borrowers feel that a long-term fix is right for them.
Taylor says: “Signing up to a long-term fixed-rate deal does offer peace of mind that your repayments will not increase over your given deal period but it is also in effect a long-term gamble on rates. While you may feel smug as rates rise, if they drop, you may be kicking yourself, especially if this persists over a long period of time.”
Platform director of risk and compliance Alexia Antoniou says: “In an environment where fixed rates could be set at market rate, with no charge for early repayment, they would quickly be a best seller. However, it is much more likely that to fund and support a long-term fixed-rate like this, lenders will need to set the rate in the top quartile and apply early repayment charges.”
Brokers and lenders have generally responded scathingly to Darling’s proposals but a handful of lenders have used his announcement to offer new longer-term products.
Nationwide says it will be relaunching its 25-year fixed-rate product which it originally set up earlier this year. It claims that the product sold out within five weeks.
Executive director Stuart Bernau says: “The Chancellor has recently expressed concern that most lenders do not offer long-term fixed rates. Our experience is that the 25-year fixed rate has a place in the market and offers long-term stability and flexibility for borrowers who want to protect against fluctuations in interest rates.”
Yorkshire Building Society is working on a new proposal which it claims will radically change the consumer view of longer-term products.
Chief executive Iain Cornish says: “Sales of five-year and 10-year fixed rates have increased dramatically over the last 12 months but the primary problem with terms longer than 10 years has been the level of early redemption charge that has to be applied to make the products economically viable.”
But Boulger believes it is wrong for the Government to push long-term fixed-rate products as a solution to the affordability crisis, pointing out that rates are nearly at a peak. He says: “There are deals in the market but people do not want them. At the moment, it is absolutely the wrong time to take long-term fixed-rate products out. If Darling’s encouraging this, then he is giving out bad advice.”