John Charcol senior technical manager Ray Boulger says that Alistair Darling’s announcement on providing longer-term fixed rate mortgages is just yet another re-announcement of previous proposals.
“Currently 29 lenders offer fixed rate mortgages for 10 years or more but only a relatively small proportion of borrowers actually choose a long term fixed rate. There is therefore already plenty of choice for those borrowers who want a long term fixed rate, including a variety of features being available, including: Full flexibility, Early Repayment Charges for half or less than half of the fixed rate term and offset.
Boulger adds: “If lenders could offer significantly cheaper rates on long term fixed rates and/or less onerous ERCs, demand would increase to some extent. The Chancellor’s proposals to bring UK Covered Bond legislation into line with legislation in the Euro zone will be helpful, but mainly in terms of increasing the availability of funds.
“More than one participant in the covered bond market has told me they only expect the new legislation to reduce the cost of funds by 0.01 – 0.02 per cent. Thus if demand increases significantly, the new legislation will help lenders meet that demand, but it will have very little impact on the actual cost of funds.
He says that the problem is that demand is unlikely to increase much unless an even steeper inverted yield curve than we have had for some time allows lenders to offer long term fixed rates well below the cost of short term fixed rates.
“Furthermore, lenders can’t artificially offer a cheaper long term fix by subsidising it with a big fee. This only works with short term deals,” Boulger adds.