Home loans released from the restricting mire of Miras
The scrapping of Miras could eventually lead to cheaper and more flexible mortgages becoming available to borrowers.
Saturday 20 March 1999
The Government's decision to scrap of tax relief on mortgages has removed any incentive for maintaining a home loan. Every logic now dictates that borrowers repay their debt as fast as possible. But they will need a quite different breed of mortgage to do so.
For example, borrowers with a pounds 90,000 loan at current rates could cut their interest bill by nearly a third, pounds 25,117 , by overpaying just pounds 100 a month. Overpay by pounds 200, and the debt is settled in 14 years with the interest bill halved. Over a period of 25-years, Miras only saved them about pounds 5,000.
Borrowers were already demanding more flexible loan packages and axing Miras will accelerate this trend. It will also free lenders to be much more innovative, by releasing them from the strait-jacket of onerous Inland Revenue regulations which the tax break brought with it.
Britain's biggest lenders are already busy with plans on their drawing boards, but Nationwide stole the march on its competitors this week with its new Euro mortgage.
And this is just the beginning. Other lenders are studying mortgage accounts which mix-and-match bank accounts, credit cards and savings accounts. Some are considering risk-rating not people but properties, and we could even see the arrival of Japanese-style inter-generational loans.
Banks and building societies are celebrating the end of Miras as a big breakthrough. For example, it often makes the greatest sense for borrowers to build up a portfolio of different kinds of loans. Fixing may get you the cheapest rate, but prevents you repaying early.
Splitting the balance between a fix and a variable rate can get around the problem. But the Miras men didn't like that, so lenders fought shy of such arrangements, unless you insisted.
If you wanted to borrow more than pounds 300 for anything another than a home loan, even an arrangement fee... the Miras men didn't like that either. It had to be done through a separate account, which confused borrowers and created labyrinthine administration problems. So again, lenders tended to give hybrid loans a wide berth.
Worse still were the regular spot checks by the Inland Revenue to ensure all the required paperwork was correct. Despite their best efforts, almost every lender in the land was fined at some stage, and forced to review all its Miras documentation; a hugely costly exercise that wasted time and money.
This all conspired to encourage banks and building societies to stick rigidly to the simple, but inflexible formula of the 25-year loans, where interest was calculated once a year.
Abbey National's head of mortgages Margaret Schwarz says: "There are a lot of things that we do today which we are doing because that's the way we always did them. But times change. One size won't fit all any more. People want quite different things from their mortgage, and our challenge is to meet all of those diverse demands."
She believes that the mortgage account will become just another loan, with borrowers packaging all their debt together under the one umbrella, as is now available in the Virgin One Account.
But running such an account was problematic under the Miras regime. Legal & General was forced to introduce a rule which said that no borrower could reduce debt below pounds 30,000 when it launched its flexible loan four years ago, to get round the problem.
Alliance & Leicester's mortgage chief, Jeff Sutherland-Kay, agrees with Ms Schwarz. He says: "Middle England is crying out for greater flexibility. We are going to see many more mortgage accounts which roll the current account, credit cards and overdraft facilities into one."
However, mortgage broker Ian Darby at John Charcol is sceptical about any all-eggs-in-one-basket approach, and points out that the Virgin loan is not particularly competitively priced, charging between 6.6 per cent and 7.45 per cent.
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