The CML welcomes Professor Miles' observation that the market is "innovative, flexible and intensely competitive for new business". The CML's response seeks to work through the various issues that might improve the efficiency with which the market could deliver a greater supply of long-term fixed-rate mortgages.
Among a number of other points, the CML suggests that -
* Any potential interventions to develop a long-term fixed-rate mortgage market should be proportionate in cost/benefit terms.
* Market forces should continue to be the primary mechanism of determining the popularity of different mortgage pricing structures.
* Action should be taken to address the issues of consumers' understanding, in particular their understanding of risk. New measures to achieve this are already under way.
* Action should be taken to resolve some of the technical supply-led obstacles, such as introducing covered bond legislation and relaxing legislative constraints on building societies' funding.
* The level of "cross subsidy", where borrowers paying standard variable rates (SVRs) are effectively subsidising those on short-term deals, is eroding very rapidly and may not require policy intervention. The CML believes the interim report overstates the outstanding level of SVR business.
* Significant data on prepayment risk would be needed to bring down the relative cost of fixed-rate mortgages and so make them more attractive to consumers. This cannot be achieved in the short term but could be a medium or long-term objective.
The CML agrees that long-term fixed-rate mortgages have a valuable niche role to play in the UK mortgage market. But the CML does not believe that they are likely to become the predominant choice for consumers in the foreseeable future, irrespective of any plausible policy interventions. Consumer demand would have to change dramatically to achieve such a shift, and this seems unlikely for the time being, because price is a major reason why consumers generally choose shorter-term deals. In an environment where general interest rates are anticipated to rise only modestly, this may be entirely rational - but increasing consumers' understanding of risk is still important.
Michael Coogan, CML Director General, commented:
"The question of whether and how to incentivise the market for long-term fixed rates is far from straightforward to answer. It depends on whether you believe that consumers are currently making rational choices or not, on how many you believe may be disadvantaged by the current structure of the market, and on whether you believe the benefits of shifting the market outweigh the potential costs.
"The CML believes that market forces should primarily be allowed to operate. Aside from some relatively minor technical interventions, we do not favour policy manipulation in favour of a long-term fixed-rate market as we believe the potential benefits are uncertain and could result in higher costs for consumers in the end.
"Any interventions should, we believe, pass the litmus test of helping to underpin the growth of sustainable home-ownership in the UK."
