Miles targets 'cost subsidisation' of mortgages

09 December 2003
The man charged by the Government to look into Britain's mortgage industry, Professor David Miles, has spoken of the 'undesirable' nature of cost subsidisation that is found within the industry.

Typically new mortgage borrowers will pay up to 2% less than someone with an established mortgage, in an attempt to attract new borrowers, but it is the higher fee sustaining the lower rate that is concerning Professor Miles.

Speaking on BBC News 24's 'Business Today,' Prof. Miles said: "Lenders in some sense are rather caught in the middle."

"In the sales of mortgages, where people focus a lot on what the industry offers up front, there is a natural incentive to offer mortgages with very low interest rates in the first few months, or first couple of years."

Prof. Miles continued: "Those products are offered, but can only be offered in a sustainable way if there are some other borrowers who are paying a good deal more."

"Borrowers who are paying standard variable rates, often in recent years in the UK have been paying interest rates of 1.5% perhaps 2% more than people who are first time buyers or new movers who are getting interest rates at very low rates."

He concluded that there was a 'degree of cost subsidisation there which is sometimes rather undesirable.'