More on the Pre-Budget Report-Stamp Duty & Long Term Fixed Rates
Posted on 9 October 2007 by
Gordon Brown’s final Budget report as Chancellor disappointingly held out no promise of any moves to make the current stamp duty land tax fair, or even less unfair. Alisdair Darling has gone very little further in today’s pre-budget report, merely saying that the Government will explore whether it can reform the stamp duty treatment of initiatives, including the First Time Buyers Initiative, to bring it into line with other shared ownership products.
Why does Mr Darling have to “explore” whether he can carry out this reform? He is the Chancellor. If he wants to reduce stamp duty, even if only for the relatively small number of people on the First Time Buyers’ Initiative, it is within his remit.“ If after “exploring” the stamp duty treatment of initiatives the Chancellor actually makes any changes it will still be disappointing for most FTBs that having had 10 years to “explore” things all the Government chooses to do is hold out the carrot of jam tomorrow to a small proportion of FTBs.
The Chancellor’s intention to “seek to increase the affordability of longer-term fixed rate mortgages” appears to be yet another re-announcement of the proposal first announced by his predecessor, Gordon Brown, 3½ year ago and re-announced by Mr Brown in his last budget. Currently 29 lenders offer fixed rate mortgages for 10 years or more but only a relatively small proportion of borrowers choose a long term fixed rate. There is thus plenty of choice for those borrowers who want a long term fixed rate and a variety of features are available, including:
- Full flexibility.
- Early Repayment Charges (ERC) for half or less than half of the fixed rate term.
- Offset.
If lenders could offer significantly cheaper rates on long term fixed rates and/or less onerous ERCs no doubt demand would increase to some extent. The Chancellor’s proposals to bring UK Covered Bond legislation into line with legislation in the Euro zone will be helpful, but mainly in terms of increasing the availability of funds. More than one participant in the covered bond market has told me they only expect the new legislation to reduce the cost of funds by an insignificant 0.01 – 0.02%. Thus if demand increases significantly the new legislation will help lenders meet that demand, but it will have very little impact on the actual cost of funds.
Demand is unlikely to increase much unless an even steeper inverted yield curve than we have had for some time allows lenders to offer long term fixed rates well below the cost of short term fixes. Furthermore, lenders can’t artificially offer a lower rate on a long term fix by subsidising it with a big fee. This only works with short term deals.
Categories: Mortgages, Personal finance, House and home, Miscellaneous
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