In particular, we welcome the recommendation to lower the minimum non-member funding limit for building societies.
Professor Miles recognises that the UK mortgage market is innovative and dynamic but concludes that problems exist in the information and advice that borrowers receive, in the structure of mortgage pricing and in the funding of fixed-rate mortgages.
Commenting on the recommendations made by Professor Miles, Adrian Coles, Director-General of the BSA said;
"Professor Miles has carried out a thorough review of the UK mortgage market and on the whole found it to be dynamic and competitive. The recommendations he makes to improve the market are sensible and considered.
"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.
"Another barrier to providing longer-term fixed-rate mortgages is the question of funding. Should this market start to develop rapidly due to consumer demand, unless building societies have increased access to raising finance from the wholesale markets, the valuable role they play in ensuring competitive mortgages are on offer would be at risk of being curtailed.
"As societies are run for the benefit of all their members there is a prima facie case that they should offer the most competitive mortgages they can. Therefore a change in the funding limit would not compromise their mutual status."
Specific recommendations include;
* "that lenders make their full range of mortgage products available to all borrowers"
This is a welcome step and will make it easier for people to compare their mortgage rates. However the detail of how this is done will need to be worked through carefully; for instance will each lender be required to offer the products of all their subsidiaries as well; would the current discounts that help first time buyers be curtailed?
* "that mortgage advisors help people assess risk by presenting "what if" scenarios, giving an indication of the scale of variability in interest rates"
The incoming regulated mortgage regime will require an affordability assessment of the customer. It seems very sensible that people are made fully aware of the risks of what is still a long-term financial commitment. A "what if" scenario will help people to make an informed choice about what type of mortgage they want.
* "that lenders include, with Annual Statements, a leaflet setting out the current mortgage rates on all their products"
Again increasing transparency and information to mortgage customers is welcome. By setting out the rates on all products it will be easier for people to check that they are paying a sensible rate on their mortgage. However, again more detailed work needs to be undertaken on whether a provider, if for instance they have several brands or subsidiaries, will be required to send information on all of the products offered by the group to all customers.
* "that if products are offered which give interest rate protection for mortgage borrowers the Government treat these as insurance for tax purposes"
Building societies would welcome this recommendation which would encourage people to buy protection against possible interest rate rises. This is clearly an insurance policy and should be recognised as such by the tax authorities.
* "that Government consider lowering the minimum funding limit by members from the current 50 per cent. 25 or 30 per cent of building societies’ funds from members would still represent a substantial source of funding"
Should the market for longer-term fixed rate mortgages develop, then building societies would of course want to be able to offer such products to their members at the best price possible. The recommendation to lower the funding limit for building societies is very welcome. Under current legislation at least 50% of mortgage funding must come from retail deposits with the society. Long-term fixed-rate funding is generally more expensive, carries greater risk and is more efficiently raised from the wholesale markets. As Professor Miles points out, building societies are run in the interests of members, not shareholders, and if the 50% funding limit prevents societies from offering their members a competitive mortgage then there is a prima facie case for reviewing it.
* "that covered bonds issued by UK lenders are treated in the same way for regulatory purposes as those issued in countries where specific legislation governing issuance has been necessary"
Building societies will want to take advantage of all mechanisms which would allow cheaper and more efficient funding of mortgages and which results in better deals for their members. Covered bonds allow greater market liquidity and are already a popular form of financing mortgages in many European countries. Their introduction to the UK market would make raising the funding for long-term fixed-rate mortgages easier.
