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Pressure to axe ERCs for long-term deals

The government is urging lenders to consider alternatives to early repayment charges to encourage the take-up of long-term fixed rate deals.

A Treasury report unveiled in last week’s Budget, entitled Housing finance review: analysis and proposals, blames ERCs for low consumer demand for long-term products.

It states: “Lenders have scope to manage the pre-payment risks associated with medium and long-term fixed rate mortgages in a number of ways, apart from ERCs.”

It says that capping such charges could distort lending behaviour by encouraging cross-subsidies, with long-term borrowers who repay their loans early paying for those who don’t.

Instead it calls for lenders to consider transferring pre-payment risks to skilled investors able to deal with borrowers repaying loans early. It also proposes hedging as a way to offset risks.

In 2004, a Treasury-backed report into long-term mortgages by Imperial College London academic Professor David Miles proposed that lenders buy interest rate derivatives to enable them to hedge against rate changes and that government issue such instruments.

But Housing finance review rejects this proposal because it could cause significant losses. Instead it calls for the industry to gauge the likelihood of borrowers repaying long-term deals early.

In its post-Budget statement, Stonehaven says it welcomes the chancellor’s recognition that long-term fixed rate deals can provide home owners with greater certainty.

The equity release provider adds that it is looking forward to seeing government moves to encourage the long-term sector.

But it highlights the difficulties of funding long-term products and structuring them in a flexible enough way to accommodate the changing needs and circumstances of home owners over 30.

Gus Parks, director of intermediary sales at Mortgage Express, says: “This is familiar ground but I still don’t know how the government intends to make long-term fixed rate deals attractive to consumers.”

The Treasury report adds that borrowers’ inability to assess the risks associated with mortgage products is obstructing the take-up of long-term products.

It says more innovative products such as shared equity schemes and capped rate and index-linked mortgages could help borrowers manage the risks more effectively.

The department adds that two affordable shared equity schemes will be made available to eligible borrowers from April 1.


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