Move to revive demand for longer fixed-rate mortgages

The Government unveiled two moves to tackle what it sees as Britain's volatile and inflexible housing market.

The Chancellor has commissioned two reports, one into whether and how a market should be developed for long-term fixed-rate mortgages – something which would be important if Britain joined the euro – and the other into improving the supply of housing.

While most mortgages in other countries are at fixed rates, nearly two-thirds of new UK mortgages are at short-term variable rates, with most of the rest fixed for less than five years. Long-term mortgages were popular in Britain until the Seventies, when roaring inflation and interest rates made them too expensive.

Mr Brown said: "With housing demand at historically high levels, housing supply has remained low. This has contributed not just to, over 30 years, a rate of growth in house prices three times that of Germany and France, but to the volatility and inflexibility of the housing market as a whole. Indeed, most stop-go problems that Britain has suffered in the last 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market."

David Miles, professor of finance at Imperial College, London, will lead the inquiry into the case for more long-term fixed-rate mortgages. Meanwhile Kate Barker, a member of the Bank of England's Monetary Policy Committee, will report on how to reduce barriers to increased housing supply.

Without waiting for Ms Barker's verdict, John Prescott, the Deputy Prime Minister, will intervene where planning authorities "fail to prepare proper plans or deliver an adequate supply of new housing; if necessary call in proposed major housing developments; and consider the case for binding local plans to increase certainty and ensure the stability of the housing market".

But the housing proposals were received sceptically. Sheila McKechnie, director of the Consumers' Association, said: "This will not be easy to deliver in practice as the industry has struggled in the past to deliver fixed-rate products that combine certainty with flexibility, instead using huge redemption penalties to lock consumers into expensive mortgages."

David Bitner, head of product operations at The MarketPlace, said: "The increase in UK home ownership that the Chancellor has proudly pointed to is a direct result of the competition and innovation of the mortgage market.

"The Chancellor had an excellent opportunity to lend a helping hand to those struggling onto the property ladder by removing stamp duty for first-time buyers."

Mr Brown also promised to reform the tax treatment of home purchases funded by alternative mortgage products – including Islamic mortgages, where homebuyers have been charged stamp duty twice because of the Islamic law that Muslims must not pay or receive interest.

Mr Brown brought relief to estate agents and homebuyers by leaving stamp duty on the purchase of properties at current rates. These vary from zero on properties worth less than £60,000 to 4 per cent on those worth more than £500,000.

Case study

Home owners

Ged and Sarah Ferris

Marketing and export manager; part-time French teacher

Home: Four-bedroom house in Ashford, Kent.

Family: Three children, Isabella, four, Susanna, six and Gabriella, 10.

Ages: 41 and 47.

Income: £42,000.

Savings: Sarah, £12,000 in investments; Ged, £1,000 Isa.

Company benefits: Car and mobile phone.

Outgoings: Variable fixed-interest mortgage: £830 a month plus £20 insurance. Pension; £100 a month into stakeholder scheme.

Politics: Conservative.

Hopes from Budget: Keen to see families with children receive a significant increase in allowances which would compensate for any increases in taxes and national insurance.

Actual Budget effect: Children's tax credit increase of £386 was undercut by the £375 increase in national insurance. £310 penalty under company car rules. Gain £12.40 a year on new tax-band rates.

Reaction: Interested in idea of long-term fixed-rate mortgages.