Banks to unveil US-style mortgages

Nothern Rock joins consortium planning long-term, fixed-rate deals to end boom-to-bust housing cycle
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The Independent Online

A consortium of banks including Northern Rock will call on the European Commission today to back an attempt to revolutionise the housing market through the introduction of fixed-rate long-term mortgages.

The European Mortgage Finance Agency (EMFA) aims to import the US model of government-backed finance companies supplying long-term funding to mortgage lenders.

It would enable banks and building societies to offer long-term fixed-rate mortgages to homebuyers, who could redeem them without penalty to get a better deal as interest rates fell.

Economists say it would boost economic growth on the Continent and fulfil Gordon Brown's aim of ending the UK's traditional boom-and-bust housing cycle.

EMFA would raise risk capital from global investors rather than its own members - Northern Rock, Crédit Agricole of France, BBVA of Spain, Irish Life & Permanent, and BCP of Portugal. But it needs an implicit guarantee from the European Commission to gain the credit worthiness needed to borrow at cheap rates on the capital markets.

The project is led by Rob Thomas, a former housing market analyst at UBS Warburg, and Roger Barker, who was an equity strategist for the same bank. Mr Barker said: "This will give consumers a much better deal because they will have cheaper mortgages and they will have access to new products with fixed rates without redemption penalties."

EMFA expects to start offering the finance in two years' time if it passes all the regulatory hurdles.

The divergence between mortgage markets in the UK and the eurozone was a key reason why the Chancellor decided in June it was too soon for Britain to join the single currency. While four out of five of all German mortgages were on a long-term fixed rate in 1999, almost two-thirds of UK mortgages were on floating rates - a figure that has probably risen as base rates have fallen to a 48-year low. The Chancellor said in June: "This means that compared with other large euro area countries, household finances in the UK are relatively sensitive to changes in short-term interest rates."

In April, the Chancellor asked Professor David Miles of Imperial College London to investigate why the share of fixed-rate mortgages was low in the UK compared with the US and many European countries. He will report next month.

Danny Gabay, an economist and director of Fathom Financial Consulting, which is advising EMFA, said the new product could add to macro-economic stability on both sides of the Channel. "The UK is always very precarious when rates go up because we end up being over-borrowed. We have this great flexibility when rates fall but now we have had a rise of just a quarter of a per cent and everyone is panicking about a 1990s-style crash," he said.

Meanwhile, the fact that so many continental mortgages are fixed means that little of the impact of the European Central Bank's rate cuts has fed through to the consumer.

Meanwhile, the latest survey of the UK housing market from Rightmove shows that home sellers were cutting their asking prices even before this month's interest rate rise. The average price of properties on estate agents' books dropped by 0.1 per cent in the first week of November after October's 3.3 per cent rise, according to the property website. Rightmove said there were signs the housing market had begun its pre-Christmas slowdown early, casting doubt on the need for the rate cut two weeks ago.

Rightmove's index was based on properties coming on to the market up to 7 November, the day after the decision to raise rates.

The Ernst & Young Item Club, which uses the same forecasting model as the Treasury, also questioned whether the rate rise had been necessary and warned that a further increase could push the economy back into stagnation.