David Miles has recognised the central role of advice in ensuring borrowers make the right mortgage decision. Professional mortgage intermediaries can help customers balance the attraction of short-term discount periods against long-term fixed rate certainty.
But, until long-term fixed rate mortgages are priced attractively, there is little incentive for borrowers to select them. Long term fixed rates may bring certainty – but if it is certainty at a higher cost, few people would be convinced.
We look forward to working further with David Miles’ review. There is more work to be done so that the actual role of the mortgage intermediary is adequately clarified.
All Types of Mortgages
Much has been made of the perceived benefits of long-term fixed rates and questions raised as to why we generally ignore them in the UK mortgage market.
Why is it that in mainland Europe and USA they are the norm, yet here they fail to stimulate excitement? Currently in the USA borrowers will change lender for as little as 0.125% – a very small margin. Lenders compete to get their business and accept transfer costs into the bargain.
I see no reason why that would not happen here if long-term rates were competitive and switching for a minimum saving was simple and at minimal or no cost.
The problem is that lenders need margins. The cost of funds are high and other, more competitive, short- term incentives are consistently available. The Miles review highlights these issues but, in its final presentation, will need to demonstrate understanding of the fact that often consumers will ultimately make decisions, best suited to their personal needs and pockets, at the time of transaction.
Hamptons International Mortgages
My first reaction to the Miles review and the rest of the mass-market media seems to be slightly different to the: “Probe into overpriced mortgages” claims made by the headline of the London Evening Standard. It was referring to the common practice of moving clients onto SVR after their deal or offer has finished, but surely this is old news.
I am surprised that even though the report states that 50%-60% of new mortgage business goes via an intermediary the role of the intermediary is given one page out of 124.
Ultimately, the report blames pricing greed for the lack of interest in long-term fixed rates but, while obviously it is an important factor, I think that inflexibility is equally important – how many of us know what will be happening in our lives in 25 years? If there were competitive long-term fixed rates with no redemption penalties they would be more popular.
My initial reaction to the main thrust of the Miles review is that it is past its sell by date.
I would argue that three to four years ago the back book was subsidising new business for virtually all new lenders, but with the abolition of MIRAS, the lessening of redemption penalties, and the fact that mortgage intermediaries now account for at least 60% of all new business, one has to question whether this is the lenders and intermediaries fault, or borrowers’ inertia. The UK mortgage market is completely different to the way it was structured five years ago and today, whether you are an existing or new borrower, you have flexibility, variety, and enormous opportunities to receive advice and find a product which suits your personal circumstances.
London & Country
The first part of the Miles review is more about identifying the reasons for such a poorly evolved long-term fixed rate market than how or if the market can really change to promote a higher take-up.
It focuses on several issues, including the fact that the high take-up of shorter-term deals is provoked by the better deals available to new borrowers than existing, although some lenders do, or may actually offer, the same products these days. This, of course, should reinforce the message to borrowers that they should be reviewing their mortgage deals to make sure that they are getting the best one. He also recognises the problems of pricing for long-term fixed rates and that the long lock-in periods also present a problem.
These are not new or unexpected observations and it will now be of real interest to see how the second part of the review will attempt to overcome these challenges.
Mortgage Advice Bureau
Long term fixed rate mortgages offer many advantages for a borrower, not least security against interest rate rises. However, mortgage advisers have great difficulty in persuading a borrower to take a 25-year fixed rate at 6% when there are currently many two-year fixed rates available at 4%.
Nowadays, the UK homebuying public are wise to the benefits of remortgaging and shop around for the best deal, however they fear committing themselves to a long-term fixed rate. They find it difficult to forsee their financial circumstances in five years, let alone twenty-five years. Many long-term fixed rate mortgages have get out clauses, so people are not locked in.
Ultimately, the only way the Government can persuade people to take on 25-year fixed rate mortgages is to ban short-term discount deals. This will restrict consumer’s choice and limit competition and innovation within the UK mortgage market. Essentially, there is no quick fix for the unpopularity of long-term fixed rate deals.