It is not often that Gordon Brown suggests Britain should take an economic lesson from other Europeans. But when it comes to stabilising the housing market and heading off knock-on risks, it seems he believes the Continental approach may be best. "Most stop-go problems that Britain has suffered in the last 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market," he said yesterday.
To tackle that, he has charged David Miles, professor of finance at Imperial College, to examine how Britain could develop a market for long-term fixed-rate mortgages similar to those available in other European countries. At present, 64 per cent of mortgages taken out by home buyers in Britain are at short-term variable rates. Combined with a housing shortage, this has contributed to a volatile and inflexible housing market, the chancellor says.
Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors, said increasing the number of people with fixed- rate mortgages would help stabilise the market. The current dependence on short-term interest rates meant home owners were exposed to rate fluctuations. "In the late 1980s and early 1990s when rates doubled, it had a big impact on the economy, and there were large numbers of repossessions," he said. "That volatility could still be in the system if rates rose sharply in future." Mortgage lenders agreed that a move to 25-year fixed-rate mortgages would bring the market more in line with the Continent and the US.
Lenders such as Halifax and Northern Rock already offer 10-year fixed-rate mortgages but they have not proved popular among the vast majority of homebuyers, who seem to prefer two- to three-year deals. Barry Naisbitt, chief economist at Abbey National, the mortgage bank, said there was "little appetite for longer-term fixed-rate mortgages" and consumers were biased in favour of shorter-term deals with terms of up to five years.
Longer-term fixed-rate mortgages are often more expensive than shorter-term deals - in part because of the rates at which banks are able to raise money in the markets. Two-year mortgages can be offered at between 3 and 4 per cent whereas 10-year mortgages are often charged at more than 5 per cent. "And because their lifestyle can vary so much within a 10-year period, people are reluctant to commit themselves to a rate that may suit them now but not in future," Mr Naisbitt said.
About 26 per cent of homes loans today are fixed-rate deals, compared with virtually none 15 years ago. However, for this type of mortgage to become really popular would require consumers to be confident that interest rates would remain low and stable, analysts said. The Council of Mortgage Lenders, the industry body, raised the question of whether such long-term deals could be made as competitive as shorter-term loans. "The product is do-able," it said. "But it remains to be seen whether 25-year fixed-rate mortgages could be offered at prices which are as competitive a rate as shorter-term deals."
Yet one mortgage industry expert said 25-year mortgages could, in fact, benefit the big banks such as Halifax, Lloyds TSB and Abbey National, which can fund the cost of mortgages largely from inflows of retail savings and would be less reliant on funding from the wholesale markets. It is the smaller banks, which have fewer savings accounts and rely on wholesale funding to support home loans that could be disadvantaged, he said. The advent of a 25-year mortgage could also reduce the growing trend for consumers to shop around for the best rates and switch mortgage providers whenever they can. Once customers have signed up for such a product, they could in effect be "locked in" for 25 years. For example, customers who have 25-year deals in Germany face huge redemption penalties if they cash in their mortgage early.
The bond market also plays a larger part in mortgage finance on the Continent. Mr Khatri said European financial institutions would often finance mortgage lending by arranging a bond, rather than basing it on deposits. "That's more stable," Mr Khatri said. But, ironically, the decision to study the Continental approach comes just as the first signs emerge that Europe is moving in the opposite direction. A recent Rics survey suggested that remortgaging and greater competition between lenders had weakened previously rigid distinctions between those countries with variable mortgage rates and those where long-term fixed-rate mortgages prevailed.
It cited Denmark as a case in point: there, people had traditionally taken out long-term fixed-rate mortgages, but over the past few years, there had been a shift to mortgages with adjustable rates as consumers started to bet on interest rates staying low.
To tackle that, he has charged David Miles, professor of finance at Imperial College, to examine how Britain could develop a market for long-term fixed-rate mortgages similar to those available in other European countries. At present, 64 per cent of mortgages taken out by home buyers in Britain are at short-term variable rates. Combined with a housing shortage, this has contributed to a volatile and inflexible housing market, the chancellor says.
Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors, said increasing the number of people with fixed- rate mortgages would help stabilise the market. The current dependence on short-term interest rates meant home owners were exposed to rate fluctuations. "In the late 1980s and early 1990s when rates doubled, it had a big impact on the economy, and there were large numbers of repossessions," he said. "That volatility could still be in the system if rates rose sharply in future." Mortgage lenders agreed that a move to 25-year fixed-rate mortgages would bring the market more in line with the Continent and the US.
Lenders such as Halifax and Northern Rock already offer 10-year fixed-rate mortgages but they have not proved popular among the vast majority of homebuyers, who seem to prefer two- to three-year deals. Barry Naisbitt, chief economist at Abbey National, the mortgage bank, said there was "little appetite for longer-term fixed-rate mortgages" and consumers were biased in favour of shorter-term deals with terms of up to five years.
Longer-term fixed-rate mortgages are often more expensive than shorter-term deals - in part because of the rates at which banks are able to raise money in the markets. Two-year mortgages can be offered at between 3 and 4 per cent whereas 10-year mortgages are often charged at more than 5 per cent. "And because their lifestyle can vary so much within a 10-year period, people are reluctant to commit themselves to a rate that may suit them now but not in future," Mr Naisbitt said.
About 26 per cent of homes loans today are fixed-rate deals, compared with virtually none 15 years ago. However, for this type of mortgage to become really popular would require consumers to be confident that interest rates would remain low and stable, analysts said. The Council of Mortgage Lenders, the industry body, raised the question of whether such long-term deals could be made as competitive as shorter-term loans. "The product is do-able," it said. "But it remains to be seen whether 25-year fixed-rate mortgages could be offered at prices which are as competitive a rate as shorter-term deals."
Yet one mortgage industry expert said 25-year mortgages could, in fact, benefit the big banks such as Halifax, Lloyds TSB and Abbey National, which can fund the cost of mortgages largely from inflows of retail savings and would be less reliant on funding from the wholesale markets. It is the smaller banks, which have fewer savings accounts and rely on wholesale funding to support home loans that could be disadvantaged, he said. The advent of a 25-year mortgage could also reduce the growing trend for consumers to shop around for the best rates and switch mortgage providers whenever they can. Once customers have signed up for such a product, they could in effect be "locked in" for 25 years. For example, customers who have 25-year deals in Germany face huge redemption penalties if they cash in their mortgage early.
The bond market also plays a larger part in mortgage finance on the Continent. Mr Khatri said European financial institutions would often finance mortgage lending by arranging a bond, rather than basing it on deposits. "That's more stable," Mr Khatri said. But, ironically, the decision to study the Continental approach comes just as the first signs emerge that Europe is moving in the opposite direction. A recent Rics survey suggested that remortgaging and greater competition between lenders had weakened previously rigid distinctions between those countries with variable mortgage rates and those where long-term fixed-rate mortgages prevailed.
It cited Denmark as a case in point: there, people had traditionally taken out long-term fixed-rate mortgages, but over the past few years, there had been a shift to mortgages with adjustable rates as consumers started to bet on interest rates staying low.
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