The CML says that there is little evidence of significant consumer demand for long-term fixed rates at their current price in the market. Although the UK mortgage market is constantly evolving, and lenders have the expertise to offer long-term fixed rates, consumers are unlikely to change their behaviour unless long-term fixed rates become cheaper, or exit charges could be removed. To engineer a shift in consumer appetite would therefore need Government intervention - either in the form of inducements to borrowers or via an agency (like Fannie Mae in the US) to co-ordinate a significant shift in funding and product design. Either of these options would be expensive - perhaps £7 billion a year if tax relief were used to encourage borrowers to move to long-term fixed rates.
Changing to long-term fixed rates would also require a change in lenders' funding structures (to avoid them "borrowing short and lending long"). In turn, this would risk undermining positive aspects of the UK mortgage market such as its innovation and competitiveness. For example, flexible mortgages would become much more difficult to operate in a long-term fixed rate environment - it is no coincidence that they barely exist in the US.
However, the CML says that the review has been timely in helping to raise awareness of risk-related issues among consumers, at a time when interest rates are expected to rise in the medium term. This very much reflects the CML's own concerns to ensure that borrowers have every opportunity to plan for the various risks they face - which naturally include not only the risk of interest rates rising, but also the risk of losing their income. The CML has been discussing various risk-related issues with the FSA, has recently published its own risk review, and is keen to work with the Government and regulators on ways to help consumers manage risk in its various forms.
The CML disagrees with the suggestion that the lack of development of a significant long-term fixed-rate mortgage market in the UK constitutes any form of market "failure". A study to be published by the European Mortgage Federation tomorrow shows that the UK has the most "complete" mortgage market in Europe, with a choice and breadth of mortgage products that compares favourably with other EU markets.
But the CML agrees that the housing market has weaknesses that contribute to the potential for instability. The most fundamental of these is the failure of housing supply in the UK to keep pace with demand. This can cause significant pricing distortions. Housing supply is the subject of a different Treasury-backed review by Kate Barker, announced by the Chancellor at the same time as the fixed rate review. If the Government plans to intervene in the housing market, the CML believes that it should concentrate on improving the supply of properties to reduce volatility in prices. Better systems are needed to link housing strategies to regional assessments of housing need and demand.
Michael Coogan, CML Director General, commented:
"Borrowers in the UK have become very price-sensitive. Few are willing to pay large price premiums for long-term certainty. The UK market's preference for medium term fixed-rate terms of 2-5 years, and the availability of capped rates, seem like reasonable compromise measures for those borrowers who need to reduce their risk of payment shock. And we are keen to work with the FSA and Government on ways to help borrowers reduce their other risks too.
"While there may be political attractions to long-term fixed-rate mortgages, there is no justification on consumer grounds for seeking to engineer a predominantly fixed-rate mortgage market in the UK. We are doubtful about whether fixed rates in practice promote market stability. Much more important is to reduce volatility in the economy generally. Remortgaging remains prevalent in countries like the US where fixed-rate mortgages are the norm - it is arguable whether these markets are inherently more stable than the UK.
"What the housing market primarily needs to improve stability is not more fixed-rate mortgages but a better match between housing supply and demand."
