The recommendations fall broadly into two groups, firstly those that are aimed at improving the advice and information that borrowers receive and at creating a fairer and more transparent pricing structure. Secondly those that are aimed at helping lenders fund mortgages and handle risk in the most cost-effective way. Many of the recommendations in the first group reflect the current best practice of lenders and financial advisors. The second group of recommendations have the potential to reduce the costs to lenders of offering several different types of mortgage.
The recommendations include:
* that lenders make their full range of mortgage products available to all borrowers.
* that mortgage advisors help people assess risk by presenting "what if" scenarios, giving an indication of the scale of variability in interest rates.
* that lenders include, with Annual Statements, a leaflet setting out the current mortgage rates on all their products.
* that if products are offered which give interest rate protection for mortgage borrowers the Government treat these as insurance for tax purposes.
* that Government consider lowering the funding limit by non-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.
* 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.
On publication of his report Professor Miles said:
"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.
"In many ways the UK mortgage market works well. It is a dynamic and innovative market. This report makes recommendations to address problems that exist in the information and advice that borrowers receive, in the structure of pricing of mortgages and in the funding of fixed-rate mortgages.
"How mortgages are made commercially viable should not rely on price discrimination and cross-subsidisation. It is wrong to believe that the only way that new borrowers can have a profile of payments that matches their likely income is one that also exposes them to substantial interest rate risk. This is why the notion that any shift away from the type of lending that has been common in the past few years will be bad for new borrowers is mistaken. In fact the advantages of the insurance given by fixing the interest rate on borrowing for several years are likely to be greatest for those that borrow a great deal and for whom income risks are large - a group likely to contain a high proportion of first time buyers."
Although there are great strengths in the UK market evidence presented by Professor Miles suggests that there are obstacles preventing the market working as well as it could:
* When choosing between mortgages a great many households attach enormous weight to the level of initial monthly repayments. Consideration of where interest rates might move in the future, and of what this implies for affordability, seems to play a far smaller role. Many households find it difficult to assess these risks and may not be much helped by the kind of information and advice they receive.
* The structure of mortgage pricing generates cross-subsidisation. This creates unfairness and makes the market less transparent than it could be.
* There are a number of potential legislative and regulatory barriers to the cost effective funding of longer-term fixed-rate mortgages.
Currently mortgages in the UK are overwhelmingly either at variable rates or at rates fixed for around two years. There are good reasons to think that if the UK market worked better many more mortgages would be at rates that were fixed for periods longer than is currently common. More borrowers would then be insulated from the impact of unexpected changes in interest rates at times when the stock of their debt was large relative to their incomes and when the impact of charges in interest rates on the affordability of their mortgages is great. This would be a consequence of the market working better - a consequence of people better understanding the risk and cost characteristics of mortgages, of those mortgages being priced in a sustainable, transparent and fair way and of obstacles that might exist to the most efficient means of funding such mortgages being removed. Making the market work better is the goal; more longer-term fixed-rate lending would be a likely consequence of that.
