Long-term fixed-rate mortgages could quickly become a reality for many borrowers if consumer understanding of mortgage products and costs is improved by lenders, David Miles says in his Review published today.
The Treasury sponsored review says "recent history" supports the conclusion consumers could be funnelled into better-suited products relatively quickly.
Increasing levels of remortgaging and switching between lenders supports a picture of an industry where the stock of mortgages is already shifting.
Currently, those most stretched on their mortgages and from lower income groups are those who would most benefit from implementing longer-term fixed rate mortgages, Miles says.
But market factors mean they may not be getting the products which are most suited to them.
Miles does not blame mortgage advisers per se for the mis-match between borrowers and their mortgages, instead pointing to a variety of issues including:
- borrowers attaching greater weight to initial monthly payments rather than looking at the overall cost over the life of the loan,
- poor understanding of interest rate risk, due to lack of advice and information on this risk,
- use of cross-subsidies by lenders, which distorts the true costs of providing different products, while often punishing existing borrowers on the books,
- laws and regulations, which are forcing up the costs of businesses involved in longer-term lending.
Miles’ conclusion is both demand and supply-side changes need to be made to introduce greater transparency, flexibility and efficiency into the market for long-term fixed-rate mortgage products to become more widely used.
Better advice is a key change needed to improve consumer understanding of interest rates and lifetime costs, but most of this burden should fall to the FSA, Miles says.
Advisers may have to spend more time with clients if Miles' recommendations are introduced, as he wants advisers to be required to go through "what if?" scenarios with clients to explain how, for example, changes in interest rates could result in changed monthly mortgage payments, depending on the type of product being recommended.
Miles also wants the Financial Services Skills Council to enforce tougher training and competency requirements with regard to their understanding of interest rates, including the impacts of volatility and the impact of rates on repayments over time given different scenarios.
The FSA is urged to implement a new information strategy, including new leaflets for borrowers outlining the risks associated with mortgages in pre-sales forms, and provide an information guide to help borrowers with remortgaging.
Miles lends support to plans for a levy on the financial services industry to boost personal finance education, including boosting consumers’ understanding of mortgage risks.
Lenders would be required to send all borrowers an annual statement which details their full range of mortgage products available to all borrowers, as well as a list of mortgage rates on all their products.
Miles argues the higher administration costs that these recommendations would entail could be offset by other regulatory reforms by the government and the FSA.
Miles, for example, suggests the use of so-called covered bonds is lacking in the UK, but could result in greater provision of longer-term fixed-rate products if lenders could use this form of lower-cost mortgage funding.
Building societies get a big boost from the recommendation that the current rule requiring 50% of mortgage lending be funded by members deposits be reduced to between 25% to 30%. The lower rates would "still represent a substantial source of funding," Miles says.IFAonline
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