So who wants a fixed mortgage for 25 years?

Very few people apart from the Chancellor, finds Melanie Bien
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The Independent Online

If Gordon Brown gets his way, UK home buyers will in future choose long-term fixed-rate mortgages, over 25 or 30 years, instead of short-term fixes and discounted deals.

Although six out of 10 UK mortgages are on a standard variable rate, the Chancellor said in his euro statement to Parliament last week that long-term fixed loans would create more stability in the housing market. Back in April he commissioned Professor David Miles of Imperial College London to look at the feasibility of establishing a market for longer-term mortgages, which are prevalent in the US and on the Continent.

But while Mr Brown believes these deals will reduce vulnerability to sharp changes in interest rates, mortgage brokers are not convinced they will be popular in the UK.

"The Chancellor has had two big ideas for financial services: CAT-standard mortgages - which few lenders [offered with any real success], apart from the Nationwide - and stakeholder pensions, which have also been a failure," says Ray Boulger, senior technical manager for mortgages at broker Charcol. "Is he going for a hat-trick?"

David Hollingworth at broker London & Country also feels that fixes longer than five years aren't likely to be popular.

"I am not sure in what way long-term fixed-rate mortgages are supposed to stabilise the housing market," he says. "They will stabilise people's repayments but not the supply of housing or the level of employment, which seem to have more say in whether the base rate goes up or down."

Introduced in the late 1980s, mortgages fixed for 25 years are not a new idea in the UK. But they haven't taken off because the rates have been uncompetitive compared with shorter fixes, and they have carried too many exit penalties, making them inflexible.

Lenders will only be persuaded to offer more competitive rates on longer-term fixes if they are forced to, if the Government provides tax incentives or if it subsidises the market - all of which are very unlikely.

"On odd occasions, 25-year fixed-rate mortgages have sold well, but only when they have offered very competitive rates," adds Mr Boulger. "They will never sell in huge quantities."

He can recall two successful 25-year deals. The first was from Bear Stearns, which launched an 11.95 per cent 25-year fix at the beginning of 1990 with no penalties. That rate may sound high now, but it was extremely competitive at the time.

The other successful 25-year deal was Standard Life's 6.25 per cent capped rate, which was introduced in June 2000 with penalties for the first five years only. At the time it was introduced, it was cheaper than five-year fixed-rate deals, hence its popularity.

There are a couple of competitive 25-year fixes around at the moment. Cheshire Building Society last week reduced its rate from 5.49 to 5.14 per cent, making it the market leader. Tellingly, the Cheshire has also made this mortgage more flexible to increase its appeal. Even so, the earliest opportunity to get out without paying a penalty comes in year six. The Cheshire has also introduced new 15- and 20-year fixed-rate mortgages, to run alongside its three- and five- year fixes.

But when you compare the rates, it is not hard to see why the society has sold only 140 25-year fixed-rate loans: a three-year fix is just 3.97 per cent. Why not opt for the shorter deal and then shop around for another at the end of the term?

"The cost of a 25-year fix is what puts people off," says Mr Hollingworth. "People who have fixed over the longer term in the past have often got caught out, stuck on a higher rate. This has cost them a lot of money to get out of. Home owners tend to be prepared to look ahead five years at a time, and you can get very competitive deals at less than 4 per cent over this period, which adds to the attraction."

Manchester Building Society has also introduced a 5.29 per cent 25-year fix on the back of the Chancellor's comments, which has penalties for the first 10 years. Leeds & Holbeck has a 5.39 per cent 25-year fix but this looks uncompetitive compared with the Cheshire and Manchester products.

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