Cheap mortgage deals targeted as Chancellor aims to slow housing market

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Gordon Brown is expected to order a shake-up in Britain's mortgage market to restrict the special deals offered to first-time buyers and those who want to remortgage their homes.

A Treasury-ordered review to be published on Tuesday has concluded mortgage lenders should not cross-subsidise different types of borrowers at the expense of other homebuyers. It will call for greater competition in the mortgage industry to correct the current "market failure".

The study by David Miles, professor of finance at Imperial College, London, could pave the way for a revolution in the mortgage market. In his Pre-Budget Report on Wednesday, the Chancellor will announce that Professor Miles will draw up recommendations to address the problems he has identified and will publish a second report to coincide with the Budget next March.

The curbs on special deals for first-time buyers could prove controversial since it could make it even harder for people to get their feet on the property ladder. Although interest rates are low, rising house prices are a huge barrier and the proportion of mortgage borrowing by first-time buyers has fallen from 39 per cent to 27 per cent in the past year.

Mr Brown asked Professor Miles to investigate why there is such a low take-up of longer term fixed-rate mortgages in Britain. Only a quarter of home loans are fixed rate, compared with more than 70 per cent in the US, 90 per cent in Denmark and almost all in Germany.

The review is understood to have concluded fixed-rate mortgages would have advantages over the widely-used variable rate ones but it has identified significant obstacles to their early introduction. That will disappoint supporters of the single currency. One purpose of the study was to ease the path to euro entry by encouraging fixed-rate loans to ensure greater stability if Britain joined, when control of interest rates would pass to the European Central Bank.