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July 10, 2007

"Short-Term Mortgages"

Good grief, this is farcical:

Mr Darling said that Labour would issue proposals shortly to boost the supply of long-term fixed-rate home loans for periods of up to 25 years.

Ministers are concerned that many lenders are only offering shorter-term mortgages so they can repeatedly charge high arrangement fees.

It's true that we don't have long term fixed rate mortgages, as is common in many other countries. But to blame that on the greed of mortgage brokers for repeat fees is simply nonsense. We don't have the wholesale markets that would enable the banks to borrow fixed rate money for 25 years. That's why they won't lend it fixed rate for that period.

The US has things like Freddie Mac which buys mortgages off the originators and then bundles them into bonds which are then sold on to investors. Other countries (I assume) have other arrangements to enable such a market.

It's the absence of such in the UK which means we don't have 25 year fixed rate mortgages. Go build it and I'm sure it would get used: but blaming the mortgage brokers is fatuous.

One other thing of course: fixed rate mortgages, at any specific rate of interest, will be more expensive than floating rate ones. Worth remembering that.

July 10, 2007 in Economics | Permalink


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When everyone has long term fixed rate mortgages exactly how effective will it be to use interest rates to control inflation?

Tim adds: Less so than currently. Actually, there's a long term thought behind all of this. Brown has been deliberately wanting to create long term fixed rate mortgages as without that, we couldn't even think of joining the euro. The effects pf changes in interest rates would just be too different for us as opposed to the other euro members.

Posted by: andyW | Jul 10, 2007 9:58:40 AM

[We don't have the wholesale markets that would enable the banks to borrow fixed rate money for 25 years]

*cough* bullshit

Tim adds: We do? Where? I know we have bond markets but not in the sort of volumes to fund the mortgage market.

Posted by: dsquared | Jul 10, 2007 10:02:54 AM

[One other thing of course: fixed rate mortgages, at any specific rate of interest, will be more expensive than floating rate ones]

also not true without very substantial qualification and even then not always true.

Posted by: dsquared | Jul 10, 2007 10:04:31 AM

Tim, I am presuming that by "we" you mean the UK rather than Portugal. Yes, as the third biggest financial centre in the world and the biggest money market, it turns out that we do have a 25 year swap curve and it is liquid. The "bond market" is a red herring; banks which lend 25 year fixed rate will borrow the money at LIBOR and swap it to 25 years. As it happens, UK customers don't want 30 year fixed rate mortgages[1], which is why all attempts to sell them have failed. But it's got nothing to do with the bond market. Quite apart from anything else, it is actually possible for British banks to issue bonds in the USA; Northern Rock funds nearly half its lending by doing so.

[1] Or at least, retail UK customers don't - 30 year fixed rate mortgages are really quite common for commercial property.

Tim adds: OK; thanks for the correction.

Posted by: dsquared | Jul 10, 2007 12:08:47 PM

Are fixed rate mortgages (generally) more expensive - I don't think that Tim said "always more expensive"? You would expect there to be some difference because of the risk of significant interest rate rises (even if these were wholly backed off through bonds, the price of those bonds should reflect that risk), countered by the expected (or just guessed) performance of interest rates over the term in question. And a related question: are long term fixed rate mortgages generally more expensive than short term versions? Again, you might expect them to be, but short term interest rates may be (believed to be) artificially high.

Now there are always going to be a small number of very good "advertising rates" available and there are also going to be a number of smaller lenders who offer good rates - these are not going to be available to the bulk of the population (and may even come with other unattractive features - high lock-in charges or low maximum %age of value available) So let us take the current advertised rates for the 3 biggest lenders (for 2006, according to the Council for Mortgage Lenders) - to simplify comparisons, I have assumed a mortgage for £150,000 and selected for no (or lowest available) arrangement fee:

  • HBOS "Tracker Rate" - 6.69%; 2yr Fixed - 6.59%; 10yr Fixed - 6.49%; Standard Variable - 7.75%
  • Abbey "Flexible Plus" - 5.99%; 2yr Fixed - 5.34%; 10yr Fixed - 5.94%; Standard Variable - 7.59%
  • Lloyds TSB Tracker - 6.54%; 2yr Fixed - 6.69%; 7yr Fixed - 6.59%; Standard Variable - 7.75%

What does this tell us? Well, clearly, even among the big lenders, there is currently a significant difference in rates. Also, they appear to believe (or they can back off to somebody else who believes) that interest rates will fall over the next 2 years (and 2, or possibly all 3, banks believe over the next 7 or 10 years). And, if you are on SVR, see a mortgage advisor NOW :)

Does this disprove Tim's point - possibly not, but it is clear evidence that things are more complicated than simple / basic economic theory would predict.


Posted by: Surreptitious Evil | Jul 10, 2007 12:19:38 PM

"One other thing of course: fixed rate mortgages, at any specific rate of interest, will be more expensive than floating rate ones. Worth remembering that."

There is such a thing as an inverted yield curve in the bond market. Weird, but usually predicts a recession (i.e. predicts that central banks will be lowering short-term rates). It's perfectly possible, then, to get fixed term lending rates lower than short-term rates.

Tim adds: As above, I rather think I've been handed my arse on this one. Given the risk is transferred (of rate changes) to the lender, yes, they are more expensive: except for all the times when they aren't.

Posted by: Kay Tie | Jul 10, 2007 7:32:37 PM

Tim, do not forget - although I am sure you know this - that the Freddie Macs are quasi-state organisations and free marketeers in the US are not happy with them. There have also been some accounting scandals surrounding at least one of these agencies. The US mortgage market is not quite a model of laissez faire.

Posted by: Johnathan Pearce | Jul 10, 2007 7:47:52 PM

floating rate mortgages mean that in the UK economy monetary policy acts like fiscal policy - great when you are cutting rates, bad when you are not. In GB's review the mortgage lenders hijacked the debate sayin no-one wanted fixed rates. Nonesense, floating rates are far more profitale to lenders as the volatilit risk is borne by the borrower. Macro meddlers love them to as it allows them to "control" consumer spending. Fixed rate, refinanceable mortgages are the secret of the american household's economic stability and success. Plus you could sell the higher yeldin bonds to pension funds instead of making them buy either govt bonds or private equity.

Posted by: MARK T | Jul 11, 2007 2:48:35 PM