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Mark Chilton on mortgages

It is a pity Stephen Knight was in Barbados last week and missed GMAC-RFC&#39s new 25-year product appearing in the Telegraph&#39s City Comment column. I think this might be a first. Even when we launched the first fixed-rate deals from First Mortgage in 1987, we failed to attract anything beyond the personal finance pages. Neil Collins was ultimately dismissive of the product, recognising that although the rate is competitive and the product has clear and containable prepayment penalties, it will not sell against the current crop of sub-4 per cent two-year discounts in the market. Of course, he is right and not just on the rate question. Intermediaries are never going to sell a product with no churn potential, despite the seeming heartfelt denials to Miles.

Long-term fixes will remain a niche product for now but there is a real market for them among the genuinely risk-averse borrower. However, I see little prospect of them selling via intermediaries, even where the client need matches them. The solution is for the products to attract trail commission but our disclosure regime makes this extremely difficult to cope with. This way, intermediary earnings would be neutralised. The alternative is direct distribution by the lender but GMAC-RFC does not have this capability. Perhaps Stephen should consider offering the product to some medium-sized building societies to distribute through branch networks.

We may look back on this as a real watershed product. While 25-year fixes are nothing new, the predetermined mixes with a tracker go some way to achieving the rate control that a US ARM has. Yes, it could be improved but I will try selling that idea to GMAC rather than give it away here. The real innovation is the overt linking of income multiples with the fixed-rate proportion. If you want big income multiples, it is only safe if you fix your rate. The longer you fix for, the more you can borrow. It is madness doing six times multiples on two-year discounts but not necessarily on a 25-year fixed rate. I wonder how the FSA will interpret fitness for purpose in this context? The only other point that interests me is access for first-time buyers. GMAC can take a more sophisticated view because of its strong credit scoring. FTBs, even on high salaries, may have left an insufficient footprint to get a good enough behavioural score.

Everybody tells me the market has been quiet since the last rate rise. I have not seen one product launch designed to stimulate demand against the rising rate environment. GMAC deserves success for its innovation but it seems like more of the same out there for the rest of the market. Rising rates will put borrowers under more pressure. Why is no one producing a solution to the problem rather than relying on rolling out another rate?

Mark Chilton is chief executive of Clearly Financial Group


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