Proposal for collar on all mortgages

January 30, 2009 by Brendan

News

This week, the Council of Mortgage Lenders (CML) has been making calls upon the government to impose an industry wide collar on all mortgages in the industry.

Many people understand what a ‘capped’ mortgage is. This is where the mortgage terms and conditions has a cap so that if interest rates rise above this, the homeowner’s interest rate is effectively stopped, i.e. capped, at a particular rate and won’t go above this.

A collar works in the other direction, so a mortgage interest rate cannot drop below the specified collar rate. Currently, interest rates are at a historical low and only 300,000 mortgages in the UK have a collar on them.

Banks are claiming that these historically low interest rates are stopping them from lending on new mortgages because there is little to attract savers to save with the banks. Banks need deposits from savers in order to lend.

If the government approves the plans, then this will stop around 3.6 million homeowners from benefiting from any further cuts in interest rates.

Michael Coogan, of the CML, said: “This is a unique and innovative solution to a unique situation. Low interest rates are a good deal for borrowers in the short term, but it is damaging the ability of lenders to fund new mortgages.”

The plan needs the backing of both the Financial Services Authority (FSA) and the government because otherwise there could be a few court cases as the change would be a breach of the homeowner’s existing mortgage contract.

Those against the plan state that the CML is offering a ‘heads we win tails you lose’ proposition to the homeowners that would be affected by the plan.