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In a fix?

A toothless attempt to investigate the long-term fixed-rate mortgage market was one of the rare scraps thrown to the financial services industry in this year&#39s Budget.

Gordon Brown announced what the mortgage industry has known for years – that the uptake of fixed-rate mortgages is much lower in the UK than in many other European countries or in the US.

In a Budget which largely ignored most problems facing financial services, he admitted this was one of the reasons for the UK housing market&#39s sensitivity to interest rates. His response has been to commission Imperial College professor David Miles to undertake a review of the factors underlying the low take-up.

Most people in the industry would welcome any measures that bring stability to the marketplace but a Government review that is not even directed to recommend any action is probably one of the weakest steps that the Treasury could have taken.

Charcol senior technical manager Ray Boulger says: “Brown&#39s words have generated a lot of interest but I am not sure exactly what he thinks he is trying to do. He is prob-ably trying to build more stability into the marketplace but he will not be able to do that just with words.”

Providers have done little more than shrug at the announced review, which many believe will be ineffective.

Independent mortgage specialist Mark Chilton is sceptical. He says: “Where other Government briefs for consultation papers have asked for recommended Government action, this review brief has not. It is just a request for the reviewer to find out what the problem is. But the slow take-up of long-term fixed-rate mortgages is a market problem that would not be easily fixed by any Government intervention.

Chilton argues that it is conceivable the Government could make fixed rate products more attractive if they provided measures such as redemption fee guarantees but he does not believe the Chancellor would want to intervene in this manner. He is not alone in this belief.

London & Country managing director Phillip Cartwright makes the point that the Government has bought in Catmarked mortgages before, aimed at stabilising the marketplace.

Although the Government may perceive there to be a lack of market for fixed-rate mortgages, most commentators agree that consumers have not gone for these types of products because they are not the best value for money.

Mortgage Express product development manager Andrew Moss believes the UK has a strong, innovative market with a greater product mix than anywhere else.

He says: “The Chancellor seems intent on trying to transfer the stability of the European and American mortgage markets into the UK. The problem is if he seeks to impose the regime of a different market on ours, he may end up stifling it.”

Boulger agrees, saying that the UK has the biggest choice of mortgage products in all of Europe and people are able to buy the deals that look the best.

He says: “Consumers will not buy fixed rates unless it looks attractive, and the things that the Government would need to do to make it more attractive are exactly the things the Government will not do.”

“The bottom line for these products is that the longer the deal, the more flexible the features that are needed to make them competitive. It is hard to see what the Government could do to develop more flexible features for fixed-rate mortgages.”

Boulger is critical of the Chancellor&#39s approach and says that the review will take at least six months and will cost tens of thousands of pounds. To his mind, all the Government needs to do is to convene a one-day consultation with industry practitioners and experts. “They could learn much more simply by talking to the right people,” he says.

Chilton says the slow uptake of fixed rates is a market problem. He says: “Whenever attractively priced tranches of these types of products are released, they sell out quickly, meaning there is considerable demand for them. But fixed-rate products will never be well received if they are priced at too much of a premium to other products or they have high access and redemption costs.”

As to what the Government could possibly do to make fixed rates more attractive, most commentators seem to have similar ideas, based on improving derivatives or lowering redemption penalties.

Boulger says: “Theoretically, the Government could somehow innovate clever derivatives but the market is better equipped to do this. The things that the Government could do are exactly the opposite to what they would want to do. For instance, guarantee interest rates will not go up or the differential between long and short-term rates will not be brought down.”


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