A couple of years ago, Chancellor Gordon Brown suggested that he was losing patience with the UK’s volatile house price rollercoaster. And, with homes in some regions doubling in value in less than three years, the government, like many others, had reason to wonder where it's all leading to.
Of course, it can be difficult to analyse exactly why house prices suddenly take off, after years of stagnation.
The recent price boom was, in hindsight, reasonably easy to predict however: after all, a combination of cheap loans and market confidence has always been a recipe for price inflation.
One of the possibilities that the Chancellor began to investigate was whether a move to US-style long-term fixed-rate mortgages could help bring some stability to the UK.
Now, our cousins across the Atlantic have a very different view to us when it comes to defining what is meant by the phrase ‘long-term’. For example, a quick straw poll around a few UK-based brokers reveals that over here the longer term is regarded as anything exceeding three to five years. In the United States, however, we are looking at mortgages that offer borrowers a fixed rate for 25 or even 30 years.
So what is it that's so different about the North American market, and would it help us over here? In the US, the Federal Reserve base rate rose to 5.25 per cent in June 2006, although they have been as low as a scarcely believable one per cent – a 45-year low.
But that didn't mean that mortgage rates plummeted to the same degree. In fact, because long-term interest rate predictions are something that's beyond the knowledge and control of even the globe's top economists, there has to be a considerable margin between the prime rate and the mortgage rate that's actually charged. As such, when the Federal Reserve cut its rates to a single per cent back in the summer, the average American still paid about six percent on his long-term fixed-rate mortgage, a figure that still applies today.
The big problem here is that, given the fact that the UK remains Europe's most competitive and sophisticated mortgage market, our consumers simply wouldn’t be interested in a product that ties them into a fixed rate of that magnitude for the full length of their mortgage term.
This historical competitiveness means that the UK consumer believes he or she gets the best deal in any event. And if the market emphasis changes after their current offer expires, they can always take out another product. Or can they?
Often our mortgages are less flexible than we think. Many times we hear of people who would like to get out of their expensive fixed or standard variable rate loans, but would be blighted by costly tie-ins that demand several months' worth of interest just to leave the product.
Having said that, though, the recent boom in remortgage products has made buyers more savvy, with the result that most borrowers look for two- or three-year fixed or discounted deals, without an extended tie-in, enabling them to hop onto the next product bandwagon when their current incentive period expires.
What we really need to do is to look beyond the current breed of fixed-rate products, where tie-ins go hand in hand with incentives. In the US, the general rule is that you are free to move around and swap mortgages as you wish. In fact, the market is by and large much simpler than ours, with a lesser range of product types and easier migration between loans. What's needed therefore is a product range that concentrates on fixed rates, but without the penalties that the market generally associates with them.
Naturally, it won't have escaped the attention of most readers that, as well as potentially promoting better market consistency, there are other compelling advantages to the US system. For a start, especially for younger (read first-time) buyers, long-term fixed rates offer a better way of calculating affordability. If, for example, we take someone's income at age 25, it is unlikely to drop over the following 15 or so years, barring unemployment, which can and should be insured against.
So this leads us onto the next major benefit of long-term fixed loans. Because they allow for superior financial planning, lenders are more inclined to offer better income multiples than under our short-term oriented regime. This means that in one fell swoop first-time buyers would be encouraged to come back into the market, helping to promote consistent but steady growth rather then the instability that we tend to experience at present - just what the Chancellor ordered.
But hasn't this been tried already? Well, in a sense, it has. The Cheshire currently offers a 25-year fixed rate at 5.97 per cent, until the end of May 2031. With up to 95 per cent loan-to-valuation, portability and overpayment facilities, isn't this the sort of product that Gordon Brown would want us all to have, especially as there is no penalty after the first seven years of the term?
So far, however, it has not taken the market by storm, and the main reason is that there are some very attractive shorter-term fixed and discounted schemes still out there. So on the face of it, a product that demands almost six per cent interest is out in the wilderness.
Statistically, our property market also favours short-termism. With the average home owner moving every five years, it seems that UK consumers are more willing to take a gamble than our American counterparts. Indeed, the old saying that the market gets what the market wants seems to ring true as, out of the 2,500 or so mortgage products available to the average customer, fewer than 100 offer a fixed-rate term in excess of five years.
So it seems that the government has its work cut out if Mr Brown is going to conquer our love affair with the short-term deal.
Andrew Frankish is managing director of leading broker Mortgage Talk. Visit mortgage.talk.co.uk