Mortgage 'rate tarts' get Brown in a jam

The Treasury-backed report on the UK mortgage market, written by Professor David Miles and published on Tuesday, held few surprises. In the Times, Patience Wheatcroft said Prof Miles had "come to the conclusion that the man at the corner shop could have told him. People like cheap deals."

Prof Miles, said Neil Collins in the Daily Telegraph, had been commissioned by the Treasury to find out "why Britain's homebuyers are such rate tarts. His answer is little more than a statement of the bleedin' obvious."

The chancellor of the exchequer, Gordon Brown, had wanted Prof Miles to discover why Britons were willing to take up variable-rate mortgages with a low opening rate of interest, instead of fixed-rate mortgages. "Yet," said Jeremy Warner in the Independent, "Prof Miles struggles to find obvious fault with a market that, by his own admission, is highly competitive, extraordinarily innovative and has succeeded in hugely expanding home ownership in Britain."

Nevertheless, Prof Miles and Mr Brown remain devoted to the idea that our long-term interests will best be served by switching to fixed-rate mortgages. "Long-term, fixed-rate mortgages are not the panacea this report suggests," said Warner. "In Germany they are extraordinarily inflexible, with very heavy penalties for early redemption and a tendency to exclude the poorer elements of society. The system in the US is self-evidently better... [But it] only works because of an implicit government guarantee of the long-term funding required to support it. Worse, it is only available to the obviously credit-worthy."

Mortgage lenders gave the report a lukewarm response, said the Scotsman. "Charcol, the UK's largest mortgage broker, said that Prof Miles had failed to comprehend that many borrowers were actually taking an 'educated view' that a succession of short-term deals worked out cheaper, over both the long and short term. Many homeowners who have stretched their resources to the limit to get a foot on the property ladder simply want the lowest monthly repayment possible in the early stages of their mortgage. They are prepared to lock themselves into less competitive standard variable rates because they reason their incomes will have risen proportionately by then and they will be able to absorb the increased payment."

Many homeowners stay ahead of rate changes by switching mortgages when their rates rise. But Prof Miles was concerned for those who stayed with the same lender, as "back book" customers, and found themselves subsidising the "front book" customers - the "rate tarts" - who have switched lenders. Tough luck, agreed many observers. "The inerts are just as free to switch as the tarts, if only they could be bothered," said Collins in the Telegraph. And, as the Financial Times said in an editorial: "It would be wrong for the government to impose restrictions to protect the lazy and the stupid."

In the Independent, Warner explained why Prof Miles was so wrong about rate tarts. "Remortgaging has become a boom business reserved not not just for the financially savvy. Mortgage promiscuity is these days practised by almost everyone."

What Prof Miles's report most clearly demonstrated, argued Wheatcroft in the Times, was the muddled thinking of the government. "This government has a schizoid attitude towards consumer power. Only this week, in an investigation into debt, the advice was that customers should seek out the most favourable terms." In its Lex Column, the FT also found a contradiction. "Bizarrely, one of Prof Miles's proposals is to call in the Office of Fair Trading," it said. "Could this be the same OFT that helped kill off sensible redemption penalties, which helped to correct the cross-subsidy and whose demise the Miles report laments?"

Given that the report provided nothing that would persuade homebuyers to opt for fixed-term mortgages, the Daily Mail's Tony Hazell concluded with a question: "How will tax-hungry Mr Brown break our love affair with remortgaging? Don't rule out another new tax based on the value of any advance given in a remortgage."