Gordon Brown's proposals to introduce long-term fixed-rate mortgages are unlikely to be attractive t...
Gordon Brown's proposals to introduce long-term fixed-rate mortgages are unlikely to be attractive to consumers because exit penalties and interest rates will make products too expensive, says the Council of Mortgage Lenders.
Michael Coogan, director general of the CML, said a new regime would need to introduce government-subsidized products and several years of consumer-specific mortgage data in order to make the long-term concept attractive.
"The key thing about proposals for a UK long-term fixed rate market - comparable with the US market - is you have to question whether people are likely to stay in the same house for 25 years" says Coogan.
"There are already some longer-term products on the market which have additional charges if the mortgage holder withdraws from the plan early, but people won't take out a product that is to going to penalize them."
Coogan's main arguments concerning the Treasury's proposal to introduce longer-term fixed rate mortgages are that the UK simply does not have the 60 years background data on consumers and their moving habits, or the government sponsored loan enterprises such as those offered by Fannie Mae and Freddie Mac in the US.
In order to attract people to long-term products, the Freddie Mac/Fannie Mae enterprises are part-subsidized by the US government as it helps to reduce loans interest rates by around 50 basis points.
The entire process also boosts the economic market as the loans attained by the two loan providers are then sold onto investment houses and banks through the corporate bond market to reduce the risk and costs.
Similarly, the 60 years of consumer data allows firms to assess whether homebuyers are more likely to move house in a shorter space of time, and whether this is likely to affect the overall cost of the product, says Coogan.
"If you have a 25-year fixed-rate mortgage in the UK, it is likely to be very expensive even though the government wants products to be penalty-free, so it would need to be underpinned [by the government]. It is unlikely that the Treasury would be prepared to take on the additional responsibilities.
"These products would also look unattractive against discounts and variable rate products. It is also not attractive to the adviser if you can't go back to the customer each time there is an interest rate cut and move people very quickly [to better rates] when interest rates fall. As a product, we are not sure consumers will like them and IFAs will only be interested if interest rates are falling rather than rising," he adds.
Coogan points out that few people have taken out one of the two 25-year mortgages on the market, offered by Cheshire Building Society and Leeds & Holbeck.
Cheshire's 25-year deal currently offers a fixed interest rate of 5.14% (5.33% APR) with 20% deposit or 5.24% (5.44% APR) with 10% remortgage deposit until 31st July 2028.
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