‘New Chancellor wants to make mortgages more affordable’
July 18, 2007 at 12:10 pm
One of the first moves of the Brown government, and Alistair Darling, his successor at the Treasury, will be an attempt to make the housing market more accessible to first time buyers. Despite Brown’s assurances as Chancellor that we had left behind the days of boom and bust, the property market has raced away from the rest of the economy. Rising interest rates, the last of which took the Bank of England’s base rate up to 5.75%, have failed to halt the march of the house price, with the average price paid trebling since 1997.
These prices, coupled with the other costs associated with buying a house, have made the plight of the first time buyer on an average income almost hopeless. One of the features of the mortgages UK banks provide, in an effort to make buying a house more affordable, is the fixed-interest period. This is when the interest rate on the mortgage is held, irrespective of the underlying Bank of England rate, at an agreed level. The usual period is around 2 years. After this time, the interest rate changes to the lender’s standard variable rate, usually a couple of points above the base rate.
The main advantage of a fixed rate mortgage is that it allows borrowers to budget more accurately, so they can feel more comfortable about exactly how much the mortgage will cost them, instead of being exposed to any changes in the Bank of England rate.
The price for this predictability is that usually when the rate is fixed, it is at a premium to the base rate. Also, if the borrower then wishes to transfer to another fixed rate deal after two years, they will have to re-mortgage, which can cost up to £1000. From this perspective, long term fixed rate mortgages, of up to 25 years, would offer better value.
In an interview with the Guardian newspaper, Alistair Darling said “When you look around the rest of Europe, it is more common to have longer-term fixed rates. We need to look at that. We need to reduce the volatility.”
In Europe, mortgages are funded differently, which allows lenders to offer fixed rates for longer periods. In the UK, banks fund mortgage lending by borrowing from the money markets, whose charges fluctuate with the Bank of England’s rate. However, in Europe, lenders fund the loans with issues of corporate bonds, which have a more stable yield. It is therefore possible for the lenders to guarantee an interest rate for a lengthier period at little risk to themselves. The Chancellor now plans to revamp covered bond legislation in the UK in order to encourage this kind of practice among UK lenders.
This proposal signals the new government’s acknowledgement of housing availability as a political issue. If voters cannot get onto the housing ladder, then they may be less inclined to vote for Labour. Darling commented, “It is a huge issue and it is not just being raised by people setting up homes themselves. Parents and grandparents are saying, ‘What’s going to happen to my children? How are they going to get a house?'”
The government has faced criticism from lenders and consumer groups, arguing that the Treasury’s refusal to increase the stamp duty threshold in line with house price acts as just as much as a barrier for first time buyers as the price of mortgaging.
