Professor Miles demands 'fairer' mortgages for existing borrowers

Report aims at improving advice and price transparency, and helping people handle risk
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The Independent Online

Mortgage lenders yesterday welcomed a Government-commissioned report which envisages better-educated borrowers negotiating with better-trained advisers for mortgages that incorporate long-term interest rate predictions. This should encourage many borrowers to take fixed-rate loans for as long as 10 years. However, the report lays less emphasis than expected on American-style 25-year mortgages and it was criticised by the Consumers' Association.

Professor David Miles of Imperial College, London, published the report, which was called for by the Chancellor, Gordon Brown, in his Budget speech last April. Professor Miles said: "If acted upon, the recommendations in this report have the potential to change the UK mortgage market and make it work better. This will be to the benefit of borrowers, lenders, other financial intermediaries and the savers whose funds are channelled through the market."

His 20 recommendations divide into two parts. The first 10 are aimed at improving the advice and information that borrowers receive, and at creating a fairer and more transparent pricing structure. The second 10 are aimed at helping lenders fund mortgages and handle risk in the most cost-effective way. Professor Miles wants more money spent on educating consumers and advisers, and on ensuring that consumers are told by lenders about their full range of mortgages. It has been common practice for the best deals to be reserved for those who have yet to select a lender, leaving existing borrowers on lesser deals.

On funding, Professor Miles wants building societies to draw as much as 75 per cent of their funding from the money markets. At present they must take at least half their funding from depositors. Professor Miles believes that these changes would help to stabilise interest rates. He says: "There may be substantial advantages in reducing the extent to which the housing market and household finances are affected by changes in short-term interest rates. The impact on monetary policy would be less unbalanced." This chimes with Mr Brown's view. He said in last year's Budget: "Most stop-go problems that Britain has suffered in the last 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market. Housing finance needs to become more certain and planning more flexible. So I have asked David Miles to examine the case for, and how, Britain can develop a market for long-term, fixed-rate mortgages - something that is important to the UK in or out of the euro, and more important in a single currency area."

The European dimension, however, is much diminished in the Miles report. Last June Mr Brown decreed that the British economy had failed his five tests for convergence with the countries in the eurozone.

Adrian Coles, the director-general of the Building Societies Association, said: "Professor Miles has carried out a thorough review of the UK mortgage market, and on the whole found it to be dynamic and competitive. The recommendations he makes to improve the market are sensible and considered. As societies are run for the benefit of all their members, there is a prima facie case that they should offer the most competitive mortgages they can."

While the report makes it clear that Miles would like to see more borrowers taking fixed-rate mortgages, it makes it clear that this would be feasible only if they also took insurance allowing them to switch out of deals that become unattractive if interest rates generally fall.

Michael Coogan, the director-general of the Council of Mortgage Lenders, said: "Professor Miles has undertaken a commendably thorough and thoughtful review, and has drawn up an eminently sensible package of recommendations. The combination of increased transparency, enhanced consumer advice about risk, access to appropriate funding and technical improvements would together smooth out the wrinkles in the mortgage market that Professor Miles has identified. In doing so, it may well be that an effect would be to increase the attractiveness of fixed rates from a consumer perspective. Some of Professor Miles' ideas, such as a free-standing interest rate cap insurance, are likely to be keenly explored by the lending industry."

However, Kath Roberts, the head of volume property services at the lawyer Eversheds, warned: "These recommendations will require a complete cultural re-education of the mortgage market and consumers. [They] operate on a short-term basis and it will take a significant shift in attitudes to encourage a long-term approach to borrowing. While it would seem a fairer system to ensure that all mortgage products are available to all borrowers, it is unclear how this would work in practice.

"Professor Miles praises the innovative range of products within the UK market, but if lenders were forced to make these available to all borrowers the knock-on effect would be to leave consumers with less choice. Lenders simply won't be able to afford to offer this level of choice."