Mortgages borrowers 'need to think ahead

British homeowners are too concerned with initial monthly payments and do not give enough thought to the overall cost, the interim report of a study into British mortgages has concluded.

The Miles Review, carried out by Professor David Miles, investigated the unpopularity of long-term, fixed-rate mortgages, and concluded that it was down to people's preoccupation with monthly repayments at the start of a mortgage deal. It also cited a poor understanding of the risk associated with interest rates, and said that the way in which lenders compete meant existing customers were subsidising the low rates paid by new borrowers.

"In recent decades there has been little long-term fixed-rate mortgage lending in the UK," said Professor Miles, on publication of the report. "This report analyses why that is so. For many households, particularly those borrowing a great deal and those whose incomes are uncertain, there are significant advantages of fixing the level of repayments for several years. Yet few such borrowers take out longer-term fixed-rate mortgages.

"Borrowers need to be helped to understand risk better and to make more forward-looking decisions, and lenders enabled to fund loans and handle risk in the most cost effective way. I look forward to consulting further with all interested parties before putting forward recommendations next year."

However, many mortgage industry experts argue that any changes to the market would be to its detriment, since it is currently one of the most sophisticated and competitive in the world.

Ray Boulger, senior technical manager at mortgage broker Charcol, said: "I agree that many borrowers were placing too much emphasis on short-term low repayments without considering the cost of a loan over the long term.

"However, they are becoming savvy. Lenders will have to change the way they compete to retain customers, as only 15%-20% of mortgage borrowers now choose standard variable rates, and that figure is falling. Lenders will no longer be able to rely on this to subsidise lower rates for new borrowers."

A second interim report by Kate Barker, a member of the Bank of England's monetary policy committee, on housing supply in the UK is due to be published tomorrow.