Miles report casts cloud over the 25-year fixed mortgage

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The Independent Online

The Government's answer to the problems facing first-time buyers is to encourage them to take out long-term, fixed-rate home loans. But in his final report on the UK mortgage market, published last week, Professor David Miles shifted the emphasis away from 25-year deals in favour of shorter fixes of "several years".

The Government's answer to the problems facing first-time buyers is to encourage them to take out long-term, fixed-rate home loans. But in his final report on the UK mortgage market, published last week, Professor David Miles shifted the emphasis away from 25-year deals in favour of shorter fixes of "several years".

In his interim report published in the autumn, Professor Miles hinted that long-term fixed deals were necessary, stretching as long as 15, 20 or even 25 years. But many lenders and brokers argued that fixed rates of that length wouldn't have appealed to borrowers.

"The UK mortgage market is the most competitive in the world and borrowers are used to having choice and competitively priced deals," says David Bitner, head of product operations at independent financial adviser The MarketPlace at Bradford & Bingley. "It's hard to see why borrowers would want to switch to a higher-priced product, even if it provides long-term protection, without a big shift in psychology."

In his final report, Professor Miles seems to have paid heed to these comments - to some extent. "The advantages of ... fixing the interest rate on borrow- ing for several years are likely to be greatest for those that borrow a great deal and for whom income risks are large - a group likely to contain a high proportion of first-time buyers," he says.

But he maintains that aggressive discounts and short-term fixes are not necessary for lenders to make a profit. "How mortgages are made commercially viable should not rely on price discrimination and cross-subsidisation. It is wrong to believe that the only way new borrowers can have a profile of payments that matches their likely income is one that also exposes them to substantial interest rate risk. The notion that any shift away from the type of lending that has been common in the past few years will be bad for new borrowers is mistaken."

A handful of long-term fixed- rate mortgages have been available for several years but take-up has been limited. The Cheshire building society launched a 25-year fix in August 2002 and has since added 15 and 20 year deals, but only 750 people have applied for one of these.

But the Cheshire believes the appetite for a longer-term fix has increased significantly. Research carried out by YouGov reveals that following the base rate rises last November and February, nearly one-third of people would now consider one.

Professor Miles also recommends greater transparency and that all borrowers have access to the same deals. Advisers should also help borrowers to assess risk by illustrating how interest rate movements would affect monthly repayments.

"The combination of increased transparency, enhanced consumer advice about risk, access to appropriate funding and technical improvements would smooth out the wrinkles in the mortgage market," says Michael Coogan, the director general of the Council of Mortgage Lenders. "In doing so, it may well be that an effect would be to increase the attractiveness of fixed rates."

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