View more on these topics

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.

Recommended

Stock Picker

Banking shares endured another torrid week. The US Federal Reserve took further steps to deliver financial stability by unveiling plans to lend up to $200bn on the bond markets in exchange for mortgage-backed securities as collateral.While this may be acceptable in the short term, in common with the Fed’s other schemes it’s likely to prove […]

SMS system offers independent product searches

Solent Mortgage Services has unveiled a new product aimed at helping brokers undertake independent product research.The Solent Enquiry to Application System allows brokers to upload client information and find suitable products to meet their requirements.The service is free to use and available via SMS’ online portal, Porthole.Kelvin Cooper, managing director of SMS, says: “Using our […]

BoE pledges £15bn to short-term markets

The Bank of England has pledged £15bn to adress liquidity issues in the short-term money markets.The injections will come at a rate of £5bn each week until April 9 and will be lent at a rate of 5.35% on three-day offer.The BoE made £5bn of liquidity this Monday, to be repaid today, in and effort […]

Arrears shoot up by 35% in first two months of 2008

Citizens Advice Bureaux says mortgage arrears have shot up by 35% in the first two months of 2008 compared to the same period in 2007.It says its latest research shows that more people are seeking help because they are having problems paying their essential household bills, such as gas and electricity, water, telephone and Council […]

Newsletter

News and expert analysis straight to your inbox

Sign up