City View: Vaunted fixed-rate mortgages can become a liability.
Remember Chancellor Brown's second big idea for converg- ing economies across the Channel? The first one, he replays at every opportunity, is that the conti- nentals should pull themselves together and run their economies like ours. The second, propounded in his 'not yet' euro statement, is that Brit- ish home buyers should take out fixed-rate mortgages so that, if ever we do join the euro, the British housing market would not be per- manently hostage to whatever the European Central Bank does with interest rates.
Well, it looks as if home buy- ers are going Mr Brown's way on their own. The Council of Mort- gage Lenders says half of all the new mortgages last month were fixed-rate deals. So this time our Chancellor is pushing on an open door? He would be unwise to bet on it.
Variable rate mortgages have been the overwhelming choice for British home-buyers because they are cheaper. Mortgages may be long-term commitments, but borrowers have a way of looking at what they will have to pay each month, starting next month.
They pick the one they can afford and if it gets more expensive when interest rates go up in a few years, so be it. With luck they will be earning more by then. Fixed rates give you peace of mind - particularly if they incorporate an American-style option to re-mortgage into a cheaper one, with a minimal penalty, whenever interest rates fall. But like other forms of insurance, fixes cost money.
In the last couple of months that cost has come down with a bump. The CML says fixed-rate deals in May averaged 4.21 per cent, while risky variable rate mortgages averaged 4.1 per cent.
It is a freak situation arising because the money markets are anticipating another cut from the Bank of England. Home-buyers, many of them re- mortgaging, are scrambling aboard while the going is good. And it is getting better all the time. Yesterday The Royal Bank of Scotland announced a range of fixed-rate loans starting at 3.85 per cent.
Terrific. But it is not what Mr Brown has in mind. Very few fixed- rate deals offered by British lenders stay fixed for more than five years. With most, the peace of mind is good for only two or three years.
Over a long term, fixed rates cost serious money. In America, where the Federal Reserve's official rate is 2.5 per cent below the Bank of Eng- land's, the average for 30-year mort- gages has just come down to 5.21 per cent - an all-time low. This time last year it was 6.63 per cent and everybody said it was the bargain of a lifetime.
It is much the same on the continent. These fixed rates cost a lot more than British home-buyers would care to pay, even in America where some of the risk is absorbed by the Govern- ment sponsored 'Fannie Mae' and (recently scandal struck) 'Freddie Mac'.
Technically it should be perfectly possible to devise some structure to shield British home-buyers from the vagaries of the Euro Bank. But it would cost them - or else the taxpayer. Mr Brown's convergence would come at a hefty price.
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|Publication:||The Birmingham Post (England)|
|Date:||Jun 20, 2003|
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