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.

One Response

  1. Reduced Interest Rates

    I am a retired person in England who regards my money (‘savings’) as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund’s interest is falling to zero. This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.

    I do not understand why the interest has been reduced; it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has been effected and has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation. I have yet to see any explanation of why interest rates have been reduced, and assume that the reasons are unacceptable to ordinary people, especially savers.

    Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.

    The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one’s money and gives future generations very little to build on.

    As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.

    If things continue as they are now, then the UK’s financial institutions and people’s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?

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