Prime Minister Gordon Brown claims to have put housing at the top of the political agenda with his proposals to increase housing stock and encourage more long-term fixed mortgages.
In addition to raising the annual housebuilding target for 2016 from 200,000 to 240,000 new homes a year and new partnerships to make housing more affordable through shared equity schemes, Brown also announced that Chancellor Alistair Darling would be consulting on a new regime to help lenders finance more affordable 20 to 25-year fixed rate mortgages.
This new regime will involve promoting covered bonds – a class of corporate bond issued by credit institutions and secured against collateral – to allow mortgage lenders to borrow more money on financial markets, while a Treasury-led review will identify further barriers to lenders wanting to raise funds in wholesale markets.
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But will his plans really ease the pressure for would-be first-time buyers and make mortgage terms a less bumpy ride for over-stretched borrowers?
Long overdue
No one would disagree that increasing housing stock is a positive move and that measures to increase house building are long overdue. There is no doubt that a chronic lack of supply has fuelled house price growth, making that first step on the housing ladder so difficult.
However, with the population growing, industry pundits have predicted that this extra stock is insufficient to plug the gap. According to the Royal Institution of Chartered Surveyors (RICS), the plans amount to a meagre 1 per cent increase every year – a figure insufficient to deal with projected household growth.
So on this first point it looks like Prime Minister Brown’s plans, although good in principle, are in fact way off the mark.
The proposal that has grabbed the most headlines is the move to longer terms for fixed deals. However many in the mortgage market will be experiencing a slight sense of déjà vu. It is just four years since the then Chancellor Brown asked Professor David Miles to report on why such mortgage arrangements were not common in the UK, to which he replied that they needed to be made cheaper.
The new regime for covered bonds aims to help lenders match borrowing and lending over the longer term, which in theory should lead to better deals.
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A cautious welcome
The Council of Mortgage Lenders (CML) has given the plans a cautious welcome, saying it is positive that the government is willing to look at funding, but too early to say whether the plans will create a significant shift in the design of future products. “Covered bonds will effectively allow lenders to borrow money more cheaply, but it will be up to lenders to decide how they will structure future products to make them most attractive for both them and their customers,” says Christopher Dean, press officer at the CML.
Indeed, for lenders, product development is always going to be driven by customer demand – and at the moment that’s all about short-term fixes. “In recent years, mortgage customers have shown a clear preference for shorter-term fixed rate mortgages over longer-term ones,” says Nici Audhlam-Gardiner, head of mortgages at Abbey. “25 years is a very long time in the financial world – economic circumstances and people’s lives change fundamentally. Few people are willing to tie themselves into a deal for this length of time – they want more flexibility.”
Halifax, which currently provides 10-year fixes, has no plans to provide longer term deals. “There’s an appetite for fixed rates, but for two to five-year deals. We do offer 10-year deals when money markets are at competitive rates and they are relatively popular. But we don’t have a 25-year fix and we’re not about to launch one tomorrow, unless customer demand starts telling us differently,” says Paul Fincham, senior media relations officer at Halifax.
Phil Rickards, head of sales at BM Solutions, holds a similar view. “Long-term fixed products are already available in the market, and they are right for some borrowers, but not for all. Ultimately, it will be customer demand that will determine the impact of the government’s proposal,” he says.
Changing the mindset
According to Moneyfacts, mortgages with a fixed rate of 10 years or more represent just a 6 per cent slice of the fixed rate market, with most being limited to 10-year terms.
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Rates do not seem uncompetitive – Cheshire Building Society’s 10-year fix has a rate of 5.69 per cent and Kent Reliance Building Society’s 25-year deal is fixed at 5.98 per cent. Manchester Building Society also fixes at a relatively competitive 5.99 per cent for its 30-year deal.
But to improve demand, Melanie Bien, director at Savills Private Finance, says it will take a shift in the mindset of borrowers.
“These proposals are nothing new – it’s exactly what the Miles Report covered – and demonstrates how little the government understands the mortgage industry. Longer fixes are available, it’s just that borrowers don’t want to fix for these periods. Anything can happen – marriage breakdown, change of jobs, circumstances, or families. Mortgage lenders won’t provide more products until they think more people want them or they won’t make money,” she explains.
Despite attractive rates, the real turn off for borrowers is lengthy tie-in periods with painful redemption charges.
“With long tie-in periods, longer-term fixed rates are seen as a step backwards away from flexibility,” says Bien. “If you could get out of it after two or three years more people would be interested, but most have a minimum six-year tie-in.”
Supportive voices
Tamsin Hemsley, spokesperson for Nationwide, says that it definitely supports the move to longer-term fixes. “That’s why we’ve decided to relaunch our 25-year fix,” she says.
The lender withdrew the product about six weeks before the Prime Minster laid out his plans and according to Hemsley, many brokers presumed it was withdrawn due to bad sales. “The real reason we withdrew was because we’d set aside a sum of money and this ran out. We always said we’d relaunch when the time was right and now it is. With rates rising, there is definitely a place for longer-term fixes. These products particularly appeal to young families who need to budget and are sensitive to rate rises,” she says.
The product is fixed at 6.39 per cent, but has an early redemption penalty of 3 per cent for the first 10 years. “We feel that no fees after 10 years is fair,” says Hemsley.
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Another lender to welcome the plans to encourage longer-term fixed deals is Yorkshire Building Society. On hearing the announcement, its chief executive, Iain Cornish, acknowledged that the primary problem with long-term fixes was the level of early redemption fees, followed swiftly by an announcement that it was currently working on a proposal to ‘radically change the consumer’s view of longer-term products’. Could this mean a long-term fix without a long-term tie-in? Cornish promises all will be revealed in the next few weeks.
Jonathan Cornell, technical director at Hamptons Mortgages, says that unless lenders do make this move and radically reduce tie-ins, demand for long-term fixes will continue to wane. “I am not really sure how the covered bond initiative will change anything unless it helps lenders provide long-term fixed rates without long-term early repayment charges,” he says.
This is a view reiterated by David Hollingworth, head of communications at London and Country Mortgages. “If lenders don’t face up to the need to cut early redemption penalties, lower rates simply won’t matter,” he says.
Broker agitation
Consumer demand aside, mortgage brokers have been angered by accusations that poor take-up of long-term fixes is partly down to commission-hungry intermediaries. This has been sparked by a recent comment made by Chancellor Darling in an interview with The Guardian, where he is reported to have suggested that the take-up of long-term fixed mortgages was hampered by brokers wanting borrowers to come back and remortgage every couple of years.
Hollingworth says this is very unfair. “It’s all a bit hackneyed and I think his comments were naïve. It’s a question of product suitability, not commission chasing. We’ve arranged significant numbers of long-term trackers – they don’t have early redemption charges and are ideal for people with smaller mortgage loans who don’t want to move around every couple of years,” he says.
Sally Laker, managing director at Mortgage Intelligence, also objects to Darling’s remarks, saying she simply doesn’t believe that 25-year fixed rate products are in the best interests of borrowers.
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“His remarks just demonstrate a lack of knowledge and understanding of what a mortgage broker does and he will probably not be in office to take the flack when everyone has fixed to a 25-year deal and rates plummet. He will not be challenged as to why he recommended a product that has meant the client has been locked into virtually a ‘lifetime commitment’ and to exit they will need to pay a large redemption penalty. While clients have the option to stay in a long-term fix, who would want to if rates are dropping and two-year deals are, say, 2 per cent lower?” she asks.
The government’s plans to lead borrowers down a specific product path may also mean a move away from best advice. “No one can predict future interest rate trends so brokers advise their clients based on a set of personal circumstances and economic data and sometimes a fixed rate deal is best and perhaps on other occasions a tracker product is more suitable. The issue today is recommending a mortgage that meets the consumers needs and requirements, not forcing them into a product that might be unsuitable – how could that be best advice?” says Laker.
Shared equity
Away from long-term fixes, another notable proposal made by the Prime Minister was to make more housing affordable through shared equity schemes. At the moment, shared equity schemes are geared towards helping key workers in priority areas. Open Market HomeBuy enables those who qualify to buy a 75 per cent stake in a property of their choice while the government and a mortgage lender provide interest-free loans to fund the remaining 25 per cent.
Only four lenders are currently signed up to the scheme – HBOS, Nationwide Building Society, Yorkshire Building Society and Advantage, the mortgage arm of Morgan Stanley. Lenders will not charge interest for the first five years, but will take a share of any increase in the value of the property when borrowers pay it off.
The initiative has been welcomed as it can give buyers a good leg up. However, one of its main criticisms is that people are put off applying because they are unsure of their eligibility and find the whole process too confusing. Different regional housing boards have different priorities so eligibility criteria can differ dramatically in different parts of the country.
To extend eligibility to more people, the government recently introduced a similar scheme called First-Time Buyers Initiative , which is being delivered through the regeneration agency English Partnership. First-time buyers must purchase at least half of the property, and then pay rent to English Partnerships, which retains the rest. Around 50 per cent of the homes available in the FTBI are for key public sector workers, but remaining homes are available to groups identified as priorities by regional housing boards, which again excludes many people struggling to make their first purchase.
With Brown saying that shared equity schemes should be a priority, could we see this market open up further? Jennifer Challenor, media contact manager at Torquil Clark, hopes so. “The First-Time Buyers Initiative has already proved successful but developments have been heavily weighted in the South East area and sites need to be better distributed regionally. If the government keeps its promises by building more shared ownership homes, then more lenders are likely to respond with an offering as they’ll want to take a slice of this market. Having more choice of products and providers can only be good news for the consumer,” she says.
Cornell is also optimistic. “More lenders are looking at shared equity products and these have the potential to solve the problems first-time buyers are facing. I’m sure market forces will push more lenders towards these products,” he says.
Brown may have broken with tradition by setting out his plans ahead of the Queen’s Speech, but only time will tell whether they will come to fruition – and more importantly, whether they will actually go some way to solving the affordability puzzle.
