View more on these topics

Mortgage edge – Stephen Knight

You can see why the Chancellor would like everybody to have a US-style penalty-free long-term fixed-rate mortgage. If base rate increases, there is no impact on borrowers. But if base rate is reduced, borrowers could redeem and take advantage of extra spending power.

So why aren&#39t these products the norm? The truth is consumers prefer what they have now – a cheaper, wider choice with more flexible options.

“Cheaper” is key. Structuring a long-term penalty-free fix so that it is attractive to funders requires a number of elements that would not be needed with a short-term deal backed by redemption penalties. These elements cost money, pushing up the customer rate – which is why long-term fixes are so expensive versus what new UK borrowers are used to paying.

Lenders would normally need to hedge the exposure by the use of derivatives. Also, with the main funding demand for this type of product remaining in the US, there would be the cost of a currency hedge into dollars. I know that EMFA feel they will be able to solve some of these structural difficulties, but having brought bonds worth £2.5bn to the capital markets this year, I can tell them that sterling demand for exposure to the UK mortgage market is relatively thin versus the appetite of US investors.

Once you cost in all the features that would enable you to offer such a one-way bet for the consumer, the price becomes much more expensive than the alternative of the popular two-year fix, or two-year discount – sometimes by as much as 2 per cent. The consumer is not interested at that price.

Some building societies have launched long-term fixes with “redemption windows” – periods which could be used to redeem penalty-free. The rate on these is around 5.99 per cent – 1 to 2 per cent above the equivalent two-year fix. It will be interesting to see if these products fare better than their predecessors.

We undertook some research in the summer, when interest rates were at their lowest. We researched a 4.99 per cent 25-year fix with redemption penalties, giving the option of adding 0.5 per cent to the fixed rate to make the product penalty-free. The response from intermediaries was overwhelming – “don&#39t bother”.

We shared this research with Professor Miles when he asked to see us as part of the report he is preparing for the Chancellor. It will be interesting to see what emphasis there is in the report on contemporary consumer preference.

And there is more to this than price. Borrowers in the UK have more product choice than anywhere else in the world. They can have fixes followed by discounts, discounts followed by caps, caps followed by trackers, flexible fixed, offset variable – even rates linked to another country&#39s currency or Interbank rate-setting mechanism. UK borrowers are used to this choice and the demands of the bland, highly structured long-term fix cannot be easily reconciled with current product flexibility.

It is difficult to see why borrowers would want to give up access to all those options unless the Government disincentivises choice in order to make long-term fixes more attractive – don&#39t rule it out.

Perhaps the answer is better consumer education. If the industry can find a way of explaining to consumers, prior to their arrival at point of sale, the benefits and risks of fixed versus variable, the market could operate normally. As a result of good education, some consumers may well want to pay a premium for longer-term fixed-rate protection. But we will in those circumstances be attracting the demand, rather than effectively contracting it by forcing it on people.

In short, there is no structural reason why long-term fixed rates cannot be made available to UK borrowers in plentiful supply. The truth is that for the foreseeable future long-term fixes answer a question the consumer isn&#39t asking.

Stephen Knight is executive chairman and UK country manager of GMAC-RFC


Standard optimistic despite plunge in business

Standard Life says it is optimistic abut the prospects for 2004 despite seeing new UK business fall by 24 per cent to £1.08bn in APE in the year to November 2003 from £1.43bn the previous year. Europe&#39s biggest mutual life company says the previous year&#39s figures were swollen by inflows of funds from Equitable Life, […]

McCarthy warns unit trust sector against late trading

FSA chairman Callum McCarthy held a meeting with 25 chief executives from the largest unit trust managers to remind them of their responsibilities in relation to late trading and market timing. On the back of scandals in the US the regulator has surveyed UK fund managers but dound no signs so far that the &#39abuses&#39 […]

Reprieve for mutuals in FSA orphan U-turn

Mutuals have won a reprieve from proposals that could have spelt the end of the sector by preventing them from using orphan assets from with-profits funds to support new business ventures. The FSA&#39s proposals for the fair treatment of with-profits policyholders – published last week in CP207 – allow mutuals to use orphan assets to […]

This is why the public is cynical about the industry

Why are the public so cynical about our industry? These examples illustrate the point. I was recently approached by a 60-year-old single man who lives in rented accommodation. He has been unemployed since being made redundant four years ago. He wanted to take a loan from his pension as he is in dire financial straits. […]

Natixis video: Making smarter use of asset classes

Content supplied by Natixis Global Asset Management This video from Natixis Global Asset Management focuses on Active Share. One strategy for the smarter use of equity investments is ensuring you get what you pay for. According to the company, looking at Active Share can give you a better perspective on where performance comes from. Active […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm