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Fixed rates versus variable rates

The fixed versus variable rate debate has built momentum in the wake of the publication of David Miles&#39 report to the chancellor for the March 2004 budget. The chancellor believes that homeowners fluctuating between one-mortgage lender to another heavily influences the unsteady market in the UK. Miles&#39 recommendation of fixing customers to longer term mortgages, as seen in the USA, could have stabilising effects in the economy and avoid the repetition of the property recession of the early 1990s.

What&#39s your view?

Council of Mortgage Lenders

The CML felt that the recommendations &#34provide a sensible package of measure that would, taken together, generate improvement in the UK market&#34. However, caution was advised, including a reminder of the need to provide a cost-effective mechanism to deliver them in practice.

Building Societies Association

The BSA expressed concerns over the funding of long-term fixed products, as building societies to fund 50% of their lending from retail deposits, making them potentially less attractive than plc lenders. Suggestions have been made that all lenders should make these products available to both new and existing customers, to enhance the long-term fix rates and make them fairer to the existing customers who may be subsidising cheap short-term deals.

The Borrower

Longer term fixed rates will assist the borrower to stabilise their finances, allowing them to budget more effectively and to ride out any sudden interest peaks in the market. Initial research, has however, shown that the borrowers prefer immediate gratification of lower interest rates against long-term stability of guaranteed fixed rates.

The Broker

It is important that customers have the option to take up a lifetime mortgage should they want one and any subsequent increase in the take-up of these products is certain to mean a reduction in remortgage work for brokers. Even so, due to best advice practices, brokers cannot allow that to affect the advice they give to the customer. However, it would seem that many customers prefer the flexibility of being able to switch mortgage products and providers depending on the state of play with interest rate movements and house price fluctuations. A large number of brokers are receiving remortgage requests from their existing client database, which indicates that borrowers are not yet ready to tie themselves down to a lifetime commitment; especially with such high redemption penalties involved. Another point to note is that if the providers of such products do not offer competitive terms for further advances, many borrowers will turn to increasing credit card debt or taking out further loans, as the option to remortgage will only be available at a high cost.

The Lawyer

It is likely the direct legal suppliers will see a downturn in remortgage work, which would result in more marketing for transactional work. However, this is unlikely to affect more traditional firms who have predominately focussed on transactional work for their source of conveyancing.

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