MINISTERS must outlaw short-term mortgage deals if borrowers are to be persuaded to take out long-term fixed rate home loans, mortgage experts warned the Government yesterday.

Industry representatives agreed with David Miles, Professor of Finance at Imperial College, who is charged with looking into the lending market, that many households would reap “significant advantages” from fixing mortgage repayments over the long term. But they also gave warning that making such mortgages attractive to consumers would be an “uphill struggle”.

Peter Brodnicki, the chief executive of Mortgage Advice Bureau, a leading broker, said: “Mortgage advisers have great difficulty in persuading a borrower to take a 25-year fixed rate at 6 per cent when there are currently many two-year fixed rates available at 4 per cent.

“The only way that the Government can persuade people to take on 25-year fixed-rate mortgages is to ban short-term discount deals. This will restrict consumer choice, and limit competition and innovation within the UK mortgage market.

“There is no quick fix for the unpopularity of long-term fixed-rate deals.”

Experts at The MarketPlace, part of Bradford & Bingley, added that a move by the British public to long-term, fixed-rate deals would need a serious shift in attitudes to borrowing.

David Bitner, the head of product operations at The MarketPlace, said: “The UK mortgage market is the most competitive mortgage market in the world and borrowers are used to having choice and competitively priced mortgage deals.

“It is difficult to see why borrowers would suddenly want to switch to a higher-priced product, even if it provides long-term protection, without a big shift in psychology.

“Longer-term fixes do play a valuable role in the market for those borrowers wanting enduring security and payment stability. However, to try and force people to take this type of product by removing choice altogether will undoubtedly end in failure.”

While lenders welcomed the bulk of Professor Miles’s analysis, they cautioned that shorter-term fixes and discounts needed to stay if the UK mortgage market is to remain flexible and competitive.

Neville Richardson, group chief executive at Britannia, Britain’s second biggest building society, said: “It is important that homeowners and housebuyers are able to choose from a range of fairly priced products which provide value, over whatever term their circumstances and individual needs require.”

Angus Porter, Abbey’s customer director, said: “If the Chancellor wishes to encourage greater stability in the housing market, the most important thing is low, stable interest rates, and not necessarily longer fixed-rate mortgages.”

SOCIETY'S FAILED EXPERIMENT

NATIONWIDE Building Society yesterday backed the conclusion of David Miles that the mortgage market is not working in consumers’ best interests. However, Britain’s biggest building society conveniently sidestepped its own failed experiment of offering low-cost loans to all homeowners.

In February 2001, Nationwide turned its back on discount deals designed to gain customers. Instead, it focused on existing members, vowing to deliver long-term good value to its million borrowers.

Brian Davis, then chief executive, bet that other big lenders would follow Nationwide. He miscalculated. Rival lenders eschewed Nationwide’s attempt to give long-term competitive rates to all borrowers, preferring to continue building market share with cheap upfront mortgage deals.

Nationwide’s share of net advances plunged to 0.2 per cent in 2001’s first half.

Some observers claimed the strategy’s initial failure led to the departure of Mr Davis, who decided to retire, at 57, that year.

Since Philip Williamson became chief executive in January 2002, Nationwide has reversed its fortunes. Borrowers returned, drawn by a range of fixed-rate loans and appealing remortgage packages, and the society’s net market share has risen to 15.7 per cent.