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Chancellor making long-term mistake

The mortgage market has largely reacted with dismay at the government’s suggestion that 25-year fixed rate mortgages will help to reduce affordability issues, despite the government’s proposal to issue covered bonds to help lenders fund the longer-term rates.

Kevin Patterson, group marketing director at Enterprise Group, says such proposals, if forced through by the government, would “kill off” the remortgage market, and that the Miles Review three years ago looked at the issue of why long-term fixed rates were not more readily available, only to conclude there was little appetite for them among lenders. Oddly, it appears the new Chancellor of the Exchequer, Alistair Darling is using the Miles Review as the basis for his case for longer-term fixed rate products.

In an interview with The Guardian, Darling says the Treasury-commissioned review into Britain’s lack of long-term fixed rate mortgage products three years ago, is what has prompted the government to reassess the short-term fixed market.

He also accused mortgage brokers of advising their clients to opt for two-year fixed rate mortgages because they “want customers to come back every two years, rather than every 10 or 20”, adding the Financial Services Authority has “identified this as a problem”.

Darling says the government thinks long-term fixes are the answer to thousands of households who face rate hikes this summer as their cheap short-term rates end.

He adds: “When you look around the rest of Europe, it is more common to have longer-term fixed rates. We need to look at that, to reduce volatility.”

Patterson says: “I can understand why the government would want to create more stability in the market, but the lenders have no appetite for it, and they have tried long-term fixed rates before with little success.

“While we have fair competition in the market we will have clients that want to move onto better rates. If the lender remains competitive the customer won’t want to move.”

Vic Jannels, chairman of All Types of Mortgages, adds: “Why on earth does the government consistently put out negative messages about our industry when the proof shows that complaints upheld figures against mortgage advisers are remarkably low?

“No-one in the mortgage market really believes in 25-year mortgages. How are lenders going to protect themselves against potentially volatile interest rates in the future?”

But Kent Reliance chief executive Mike Lazenby argues brokers are reluctant to sell fixed rate mortgages with terms of five or 10 years, let alone 25, despite the fact such loans are often cheaper than two and three year fixed rates.

“Kent Reliance’s long-term fixed rate loans are entirely portable, which means that even if you move after five years, you can take the mortgage with you and continue to pay the same rate for the 20 years remaining of the original term. Unfortunately, some brokers prefer to resell new mortgages every two or three years and even when the borrowers don’t pay a fee, they pay indirectly as the lender will pay the broker and pass on the costs.”

Jonathan Cornell, technical director at Hamptons Mortgages, says: “While I am sure the new chancellor means well, I think he is flogging a dead horse. Professor Miles spent much time investigating long-term fixed rates, and despite brave attempts from some lenders very few long-term fixed rates were sold. I do not believe the only reason why brokers sell short-term rates is to maintain their opportunity to remortgage clients in a couple of years.

“All long-term fixed rates have long-term early repayment charge periods and, as we know, our lives may change significantly over a five, 10, 15, 20 or 25-year period. In my experience these penalties discourage clients from taking out long-term fixed rates.

“In the US, which is often used as an example of somewhere where fixed rates are very popular, these long-term fixed rates do not have early repayment charges, enabling borrowers to remortgage or repay their loan at any time without being penalised.

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