U.K. LENDERS OFFER MORE FIXED RATE MORTGAGES
More U.K. Lenders are offering homebuyers
fixed interest rate mortgages under which the borrower makes
the same monthly payment no matter what happens to other
interest rates.
    And with mortgage rates now at their lowest levels in
years, the loans have been snapped up by eager home buyers
trying to lock into cheap money.
    The decision to offer fixed rate loans, industry officials
said, reflects the increasingly competitive nature of the home
mortgage business.
    While fixed rate mortgages are uncommon in the U.K., They
were the mainstay of the business in the U.S. Up until only a
few years ago.
    But in the early 1980s interest rates soared. U.S. Lenders,
mostly savings and loan associations, were earning rates as low
as three pct on 30 year fixed rate mortgages they held in their
portfolios but had to pay depositors rates as high as 15 pct to
induce them to retain their accounts.
    As a result hundreds of institutions collapsed or were
forced to merge. The survivors decided to offer mortgages whose
rates would move in line with the cost of funds.
    "We very much have the example of the U.S. Thrifts in mind,"
said a spokesman for Abbey National Building Society,
explaining why his institution, for the time being, is only
offering variable rate mortgages.
    The rash of advertising to solicit new business has helped
homebuyers to become even choosier about loans and lenders
concede they are being forced to undercut each other still
more.
    Sharp cuts on variable rate mortgages announced earlier
this week by the nation's two largest building societies and by
National Westminster Bank Plc reflect growing competition for
new business, officials at all three institutions said.
    The fixed rate mortgages on offer carry interest rates even
below those on the variable rate loans.
    "Of course they are less profitable than other (variable
rate) mortgages," said a spokesman for Midland Bank Plc, which
earlier this year said it earmarked 500 mln dlrs for fixed rate
new mortgage loans.
    But he said the bank is willing to offer less profitable
loans because, "It was just another way to attract people to our
mortgage product."
    Trustee Savings Bank Plc (TSB) was offering five year fixed
rate mortgages at 9.9 pct earlier this year.
    The 100 mln stg that TSB set aside for the loans was
exhausted within just a few days, according to a spokeswoman.
    "Everybody loves an under 10 pct mortgage," she said, noting
that within five days the bank loaned the equivalent of 25 pct
of its 1986 volume.
    In short, the appeal of fixed rate mortgages is that they
offer an opportunity to gamble on the direction of interest
rates. If interest rates fall after the mortgage is made the
lender is earning an above average return on assets.
    But if interest rates rise it is the homebuyer who has won
the benefit of cheap money.
    Household Mortgage Co had planned to offer a 25 year fixed
rate mortgage after the June 11 elections on the assumption
that a Conservative Party victory would help money market rates
fall further, according to Duncan Young, managing director.
    Young explained that the company had planned to protect
itself against the chance of rising interest rates by buying a
complicated hedging instrument.
    But money market rates have risen contrary to expectations
and the company has shelved its plans for the time being. He
said money market rates were too high to arrange both the
mortgages and hedge profitably.
    However, he said that when the Household Mortgage Co does
make fixed rate mortgages it is likely to securitise them. This
means bundling different mortgages together to resemble a bond
and selling them to an investor.
    For technical reasons securitisation is simpler and more
efficient with fixed rate rather than with floating rate
mortgages. In the U.S., Where fixed rate mortgages are popular
again, securitisation has provided the bulk of mortgage money
over the past few years.
 REUTER
