Think of '82 and then imagine life on a 25-year, fixed-rate mortgage
If the Falklands war seems a a distant memory, that's how long you can now set your repayments in stone
Sunday 01 April 2007
Modern life is disposable. The length of time we keep our jobs, cars, homes - partners even - or sign up to contracts with gas, electricity or phone companies has fallen considerably. In the 21st-century consumer society, the only constant is the pressure to keep chopping and changing to get what we want.
It's no different with our hunt for mortgages. As we leave lender loyalty behind in favour of finding the cheapest deal, the average length of a fixed-rate home loan is now just 3.5 years, says broker John Charcol. A decade ago, it was 5.5 years.
All the stranger, then, that lenders have been jostling in recent weeks to offer knock-down interest rates on longer-term, fixed mortgages, particularly those over 10 to 15 years. And last week, Nationwide building society took things a step further, becoming the first big UK lender to offer a 25-year fix.
The new "quarter-century" rate is a competitive 5.49 per cent whose selling point is "the guaranteed stability of payments", according to a Nationwide spokesman.
The backdrop to this staggeringly long fix is a growing nervousness among borrowers who have noted three 0.25 percentage point rises in the Bank of England base rate since August 2006 - and the further quarter-point increase expected later this year.
Long fixes might also appeal to homeowners who are keen to avoid average arrangement fees of £500 each time they remortgage on two- or three-year fixes.
Nationwide says its 25-year deal will be "a test home loan" and adds that it has only reserved a small pot of funds, around £50m, to spread across those borrowers who apply.
The offer follows a rash of cheap, long-term deals launched by rivals, including Abbey's 15-year fix at 5.39 per cent and Norwich & Peterborough building society's 20-year fix at 5.28 per cent. But critics warn of the downsides of setting your repayments in stone for such long periods. For example, choosing Nationwide's 5.49 per cent, 25-year deal suggests you're taking some sort of view on where interest rates might go over this time - and that's anybody's guess.
A quarter century ago, in 1982, the average rate was 11.89 per cent. Who then could have predicted today's rates.
"Can anybody really know what they'll be up to over that amount of time?" asks Melanie Bien of broker Savills Private Finance. "The shifting nature of many people's lives - careers, family, a move overseas - can mean that circumstances overtake them, demanding change."
And the need for change - such as selling up - clashes with lengthy mortgage deals in that it tends to entail a financial penalty.
"The main problem with long-term fixes is that they usually come with tie-ins for the entire duration of the loan, meaning you will have to fork out an early-repayment charge (ERC) to leave," says Nick Gardner of broker Chase de Vere. "This inflexibility makes them unsuitable for most borrowers."
However, lenders are trying to address this. Nationwide's 25-year deal only ties the borrower in for 10 years, after which they can continue with the security of the set payment or leave without paying a penalty.
But if your circumstances change in the first 10 years - because of a marital break-up, say, or a work relocation abroad - you'll be hit with a 3 per cent charge to leave the deal. On a typical £175,000 home loan, that penalty would cost you £5,250.
A twist on this concept comes from Cheshire building society, whose long-term fixes allow borrowers to "escape" without an ERC on certain anniversaries of the deal being taken out, adds Mr Gardner. "However, with the Cheshire, the first of these [opportunities to leave] doesn't kick in until 10 years into the loan."
Meanwhile, even "portable" loans - those that can be carried on to a new home - may throw up problems for people on long-term fixes who are looking to move. That's because they will be underwritten again by the lender. So if your circumstances have changed - your income has fallen, say - you may not requalify for the deal or a loan extension. This could mean you have to redeem the mortgage and pay an ERC to be able to seek out another lender.
To inject some flexibility into these long-term fixes, lenders allow borrowers to "overpay" chunks of their home loan when they can. This feature, though, will vary: Northern Rock's 15-year fixed rate lets you make unlimited overpayments, Norwich & Peterborough allows 10 per cent of the original loan each year, and Nationwide permits just £500 a month.
Despite the burst of long-term fixes, consumer demand is still lacking - something exposed in a government-commissioned report in 2004. This found that - unlike in continental Europe and the US - long-term fixed mortgages did not make sense for UK homeowners because the mortgage market was so competitive in the two-year, fixed-rate sector.
Anyone considering a lengthy fix must seek advice from a broker. "Whatever your decision," says Ray Boulger at broker John Charcol, "it's going to stay with you for a long time."
'Rates will only go up'
Caine Lloyd, 32, is about to complete on his 20-year fixed mortgage, priced at 5.28 per cent, with Norwich & Peterborough. He borrowed £180,000 against his £300,000 home in Norwich.
"I have had two-year fixes before, and every time they have come to an end, rates have been higher," says Mr Lloyd.
"I have only taken this loan over 23 years and am fixing for 20 of them. It's nice to know I won't have to deal with this again in the near future - especially as I think rates are only going to get higher."
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