Report calls for 'fairer mortgages

A government report today urged mortgage lenders to provide fairer products, including long-term, fixed rate loans.

Commissioned by Gordon Brown in the last Budget, the review of the UK mortgage market was carried out by Professor David Miles, who sought to find out why more people in the UK did not opt for mortgages with a fixed rate of interest for the term of the loan.

This sort of home loan is very popular in continental Europe, but only a very small proportion of UK mortgage borrowers choose them, and only a small number of lenders offer them. Instead, the majority pick variable rate loans, which rise and fall in line with the Bank of England base rate, or loans which have a fixed rate of interest for a short period, say two to five years.

Some argue that the housing market would be more stable if more people were to choose longer term fixed loans, as home owners would then be less affected by changes in interest rates.

Prof Miles also called for a wider shake-up of the mortgage industry, recommending that lenders make all mortgage products available to all borrowers. Currently, many lenders make their cheapest deals available exclusively to new customers in order to lure them in, so existing borrowers effectively subsidise the lower cost loans by paying higher rates of interest.

He recommended that advisers highlight the risks involved in short term and variable mortgages by using "what if" scenarios, pointing out what a mortgage would cost a borrower should interest rates rise.

On publication of his report Prof Miles said that the in many ways the existing mortgage market "works well" and is "dynamic" and "innovative".

He added: "If implemented the recommendations would improve the UK mortgage market by getting better information and advice to customers, making the pricing of mortgages more transparent, removing potential obstacles to the emergence of new products and improving the ways in which fixed-rate mortgages can be funded."

Adrian Coles, director general of the Building Societies Association, welcomed the review. He said: "Customers need information in order to assess the risk of what is still a long-term financial commitment. Greater transparency and allowing all customers access to the same mortgages, whether they are new or existing borrowers, will mean greater choice. Customers should be aware of the risks of interest rate rises and the effect these can have on the affordability of their mortgage. By providing more information they will be able to make informed decisions."