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What are the long term aims?

Is it the first step to reducing volatility in UK economic cycles, a waste of taxpayers&#39 money on an academic exercise to prove something we already know or a project set up to give Gordon Brown another reason not to join the euro?

These are just some of the reason that IFAs and the mortgage industry have put forward as to why the Chancellor has announced a review looking at the causes of the UK&#39s antipathy to long-term fixed-rate mortgages?

The overwhelming reaction from the mortgage sector is a feeling of a waste of time and money mixed with puzzlement at where the review could be going.

In contrast with other reviews, the brief for this one contains no recommendation for Government action. The surprise from the industry reflects the fact that nobody perceived the low UK uptake of long-term fixed-rate mortgages as a problem in need of urgent attention.

The review will be conducted by David Miles, professor of financial economics at Imperial College London.

Whatever the benefits that long-term fixed-rate mortgages bring to other economies, the universal view among mortgage professionals is that the UK mortgage market is probably the most sophisticated in the world. Consumers can buy long-term fixed rates if they want them but there just is not the demand.

A recent survey from Paragon Mortgages shows that fixed-rate mortgages represent 29 per cent of all lending while base rate trackers account for 32 per cent and are the most popular, suggesting that consumers believe that low interest rates are set to continue in the long term.

But some industry pundits admit that the Chancellor is right to say that UK household income is susceptible to volatility because of the preference for variable-rate products, leaving the overall market more likely to react violently to changes in interest rates.

Germany, on the other hand, has until recently benefited from a less cyclical growth pattern in part because of its tradition of 15-year fixed-rate mortgages. In the US, fixed rates extend even longer, with 25-year fixes quite normal.

But the UK owes the shape of its mortgage book in part to historical and legislative factors. The tradition of variable rates has grown in the UK because building societies are forced to have retail funding.

Hometrack housing economist John Wriglesworth says: “Through the Building Societies Act, lenders have had to provide the funding for their mortgage book from retail inflows paying out at variable rates.”

Wriglesworth believes the only way you could get UK consumers to go for long-term fixed rates is by interfering in the market. He says: “There is not an economist in the world predicting an increase in interest rates of more than 1 per cent in the next 10 years. People are not interested in long-term products. The Government is in danger of imposing rigidity and risk into the market.”

Independent mortgage expert Mark Chilton believes 25-year fixed rates will never take off in the UK unless the Government sets up an institution that will underwrite the long-term redemption risk. He says: “The UK long-term institutional money markets would not accept the redemption risks. You will only achieve bigger take-up through an institution that would take on the long-term investment risk.”

Standard Life Bank&#39s ability to offer 25-year products is supported by the fact that it is part of a big insurance company. Chilton says mortgage providers which are part of big insurers have an advantage in offering 25-year rates because they can match the long-term risk against their annuity book, reducing their overall risk profile.

Chilton says: “Providers such as Standard Life Bank can achieve a degree of natural hedging of the risk by matching it to their life office book.”

But brokers warn that if the Treasury does manage to persuade borrowers to take long-term fixed-rate mortgages it will not stop house prices rising and could even push prices higher as lower repayment volatility would mean that lenders could relax over income multiples.

Charcol senior technical manager Ray Boulger says: “Halifax already offers 0.55 per cent higher income multiples for a 10-year fix than for a five-year fix. For properties over £100,000, I could foresee income multiples going up to seven times for 25-year fixed-rate mortgages.”

So where is the Chancellor going with this latest search for market distortion? Wriglesworth says: “The Government should stop trying to deny consumer choice. Catmarked mortgages were no great success and now they are not only forcing advisers to get qualified but also contemplating trying to force mortgage advisers&#39 hand in the type of mortgages they sell.”

But Wriglesworth thinks the mortgage sector need not be overly concerned by the review. He says: “I am not worried. Professor Miles will tell the Chancellor exactly what we all know – that the UK does not have 25 year fixed rates because there is not much demand for them.”

The real reason could be to strengthen Brown&#39s case against euro entry. The five economic tests require convergence between the UK and the eurozone and flexibility to cope with change.

Boulger says: “This review is a waste of taxpayers&#39 money. I would not rule out the Chancellor wanting to prove that the UK is not best served by having long-term fixed-rate mortgage products so he has another reason for us not joining the euro.”


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