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Covered Bonds Hope to Encourage Long-term Mortgages
It was back in 2003 that, as Chancellor, Brown commissioned a report to examine why long-term fixed-rate mortgages are so unpopular in the UK. The report found that many consumers seem unwilling to sacrifice a low initial rate of interest in return for guarantees that repayments will not increase. Also, the report pointed out that there have been very few long-term mortgages available to consumers. With the few long-term mortgages that are available, pushed out of the market by the discounted short-term products, making the long-term seems the expensive option. Lenders however, are not to blame, as they are only responding to the market as borrowers have shown absolutely no interest in taking out 25-year fixed rate mortgages.
Although popular in the US and the rest of Europe, such mortgages only account for 5% of current UK home loans. The fact that the majority of UK consumers are opting for short-term loans is believed to be cause of the UK’s volatile housing market, the shift to long-term loans is hoped to help smooth out such erratic ups and downs. The promotion of ‘covered bonds’ by Browns new proposal will hopefully encourage such a shift in the housing market.
Bonds are essentially IOU’s which are issued by companies or governments to raise money as oppose to either putting up taxes or borrowing from a bank. A ‘Covered Bond’ is one whose ultimate repayment is secured on a mortgage. Such bonds, along with other ‘behind-the-scenes’ government mechanisms should result in lenders being able to lend more money out to consumers in the form of long-term mortgages.
In response to this numerous building societies are launching various long-term fixed-rate mortgages, notably Nationwide who are re-launching their 25 year deal. At 6.39%, it’s not the best deal available; in fact of the few that are available, it is the most expensive. However, unlike similar deals, Nationwide imposes no early redemption penalties after the first 10 years. This means that borrowers get the ‘security’ of a 25 year mortgage with the option of switching to another after the first 10 years without incurring an early repayment charge. This article is free for republishing
Source: http://www.articlealley.com/article_190115_19.html
Keywords: 25 year fixed rate mortgages, building societies, chancellor brown, covered bond, covered bonds, fixed rate mortgages, gordon brown, government mechanisms, home loans, housing market
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