Is it time for you to get a fix?

In the US, long-term fixed-rate mortgages are the norm. And the trend here is edging in the same direction, says Christopher Browne
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The Independent Online

Are you a fixer or a switcher? Do you prefer to fix your mortgage payments over a set period of five years or more, or are you happier playing with a variety of products? The contrary property scene has turned many of us into serial switchers, as we try out the latest discount, tracker or repayment schemes in our search for the best and cheapest deals around.

In the US, however, the average homeowner plays a longer game. Thirty per cent of them have 25- or 30-year fixed mortgages with low interest rates and no exit penalties. They can afford to be forward thinking, however, as all fixes are propped up by huge reserves of government capital. In the UK, we have to pay more for our long-termism as the high costs of fixed-rate loans are passed on to us by lenders.

The government is impressed with the American system. In his April Budget, the Chancellor Gordon Brown announced a review of long-term fixed-rate mortgages. Professor David Miles of Imperial College's finance department is drafting a report to see if the 25-year fix could become a regular everyday product in the UK. His findings are due in the autumn and will be included in the next Budget.

So, apart from tradition and habit, why are we Brits reluctant fixers? Bernard Clarke of the lenders' trade body, the Council of Mortgage Lenders, blames redemption penalties. "A borrower with a discounted variable mortgage of under four per cent and no exit fees is unlikely to swap it for a long-term fixed mortgage with redemption charges," he says. "Homeowners are wary of paying extra fees and favour more flexible loans that enable them to remortgage without finding themselves locked into a deal they subsequently regret. With discounted, tracker or variable-rate mortgages, you can move house, pay off large lump sums and/or borrow more whenever you choose," says Mr Clarke.

What type of homeowner benefits from a 25-year fix, then? Anyone with a hefty mortgage or a tight budget - as he or she can protect their monthly payments from market fluctuations and bank-rate rises.

One of the first lenders to offer a long-term fixed-rate mortgage was Standard Life Bank. Three years ago, it included a 25-year tracker in its portfolio. It was similar to a fixed-rate loan, tracking Standard Life's variable rate mortgages a fraction of a percentage point higher and capped at 6.25 per cent. But the loan, aptly titled Future Perfect, was dropped after three weeks due to overwhelming demand. "We sold shed-loads of the mortgage, but couldn't support it because of the high costs involved, so we took stock and abandoned it, re-introducing it a few months later," says a spokesman. Again, the response was so huge that Standard Life couldn't sustain the funding costs, and the mortgage was withdrawn after six weeks. However, in 2001, Future Perfect made another comeback and this time lasted for more than a year, during which time Standard Life sold hundreds of the mortgages. "We certainly want to introduce it again, but don't want to get it wrong so we're biding our time," adds the spokesman.

Another lender was prompted by the Chancellor's April announcement. Leeds and Holbeck Building Society brought in a 25-year fix last month with a 5.39-per-cent interest rate. Like all fixes, it has redemption charges, although anyone who switches when five years is up can do so completely free. "We realise borrowers like to switch around sometimes and take advantage of interest-rate cuts, so this enables them to do so. We also offer customers the same penalty-free deal every other year after that, which means they can redeem their mortgage and move to another lender if they so wish," says a spokesman.

Bob Gratton, senior product manager for the Chesire, says there is one important reason why so many people opt for short-term loans. "Independent financial advisers and mortgage brokers make more money when people switch around every two or three years, so they are less likely to persuade them to buy a one-off, 25-year, fixed-rate loan," he says.

In the past few weeks, interest rates on the shorter two- to five-year fixes have fallen enticingly low. If, however, you are a medium-term planner, the Cooperative Bank has a 10-year fix with a 4.89-per-cent interest rate. "We introduced it as a bit of a gamble, but it's become our second-best-selling product," says Paul Rumbold, the bank's head of mortgages.

There's no doubt a long-term fix gives you peace of mind, but at a price. Government backing and funding could undoubtedly change all that. So let's see what the Chancellor has to offer in his next Budget. After all, a third of US homeowners can't be wrong.

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