Chancellor looks to unite mortgage lenders and
investors

Affordable 25-year deals required to reopen funding markets

In an attempt to ensure that "low and stable" mortgage rates are available to home buyers, the chancellor Alistair Darling is trying to reopen funding markets for mortgage lenders and persuade them to design "affordable" 25-year deals.

Acknowledging that "uncertainty in the financial markets is having an impact on mortgage lenders here in the UK", Darling used his maiden Budget to create a working party uniting the Treasury, the Bank of England and the Financial Services Authority with mortgage lenders and investors.

This immediately prompted concern that the process would take too long, the working party is not due to report back until the Pre-Budget report in the autumn.

In a 95-page document accompanying the Budget speech, the government admitted the shut-down in the so-called securitisation markets that hurt Northern Rock had also affected other mortgage lenders by raising the cost of financing new mortgage deals.

While 20 years ago lenders funded their mortgages from savers' deposits, the picture has changed as a result of securitisation. This allows lenders to package up mortgages and sell them on to other financial firms, in turn raising fresh finance for mortgage deals. This market has dried up in the wake of the US sub-prime credit crisis, and Darling is trying to free up financing again.

The government wants the industry to develop a "gold standard" market for mortgage-backed securities to give investors more confidence to buy the repackaged mortgages. Although there had been concern this would create a two-tier market, encouraging people borrowing higher loans to value or with poorer credit histories to pay more for their home loans.

Darling also said he wanted to see "more flexible and affordable long-term fixed-rate mortgages for 10, 20 or even 25 years" and has launched a consultation with the industry which will be concluded in time for the Pre-Budget report.