Financing long term lending

Fixed-rate mortgages to bring more stability to the housing market!

The government has unveiled proposals to encourage lenders to offer “more affordable” long-term, fixed-rate mortgages in an effort to bring more stability to the housing market.

Gordon Brown said the Government would legislate to introduce so-called covered bonds to assist mortgage firms finance their lending over the longer-term. Covered bonds, a type of mortgage funding that is common in continental Europe, allow lenders to offer better rates because they can borrow more cheaply in wholesale markets.

However, lenders said the Government’s plans would only reduce the cost of long-term fixes by as little as one hundredth of percentage point.

Most lenders have been aware that the legislation was coming and, to a large extent, have already priced this benefit into their long-term, fixed-rate deals.

You could argue that the lack of long-term, fixed-rate mortgages has more to do with the lack of customer demand than the lack of clever financial engineering solutions. Lenders would need to build more flexibility into long-term fixes if they wanted to encourage borrowers to tie in for longer.

At present, many long-term fixes have early redemption penalties which means borrowers have to pay large fees if they want to move lenders. This discourages people from taking out these loans because no one knows how their circumstances might change ten years down the line. They might move to a lager house and need to borrow more cash or split from their partner and need a completely new loan.

The Government first said that it wanted more 25-year, fixed-rate mortgages three years ago. In 2004, when Gordon Brown was Chancellor he commissioned and endorsed a report on the issue, but shelved the recommendations.

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