We shall not be moved: the loans that last a generation
As the Chancellor talks up 25-year fixes, Julian Knight asks if the immunity to rate movements is outweighed by the inflexibility of long deals
Sunday 16 March 2008
It's official: the Government wants us to take out more 25- year fixed-rate mort- gages. Chancellor Alistair Darling used Wednesday's Budget to put the case for fixes from 10 to 25 years, and announced a review to see how more of us could be persuaded to sign up.
But we have been here before. In 2004 Professor David Miles published a review for the Government, in which he called for far more long-term fixed-rate mortgages. In continental Europe, fixes reduce household sensitivity to interest rate moves and help avoid "boom and bust" economics.
But despite the political backing, these long-term deals still account for only a tiny percentage of the mortgage market.
"This issue keeps rearing its head but nothing seems to happen," says David Hollingworth at broker London & Country. "The old problems persist with long-term mortgages: a lack of flexibility and very high charges for early repayment."
Take Kent Reliance's 25- year mortgage. While its headline rate is a competitive 5.5 per cent, if a borrower wants to move away at any time, they have to pay a redemption penalty equivalent to 3 per cent of the loan. On a £200,000 deal, that works out at £6,000.
"The difficulty arises when people look to move home. They may need to borrow more money and their lender may not want to advance them more cash. Under such circumstances, they could be faced with losing their dream home or remortgaging and paying a hefty repayment penalty," adds Mr Hollingworth.
Some providers, though, are at least trying to offer a fixed long-term rate while at the same time loosening customer tie-ins. The Manchester building society, for instance, has no early repayment penalty and instead levies a high upfront arrangement fee, equivalent to 2 per cent of the loan. But customers will get a big part of this fee refunded if they stay with the lender for at least 10 years.
The rates for these deals have also improved in the past few years. When the Miles review was published, the premium for long-term fixes was sometimes as much as one and a half percentage points. Nowadays, they are much closer in price to the market-leading two- and five-year deals.
Nevertheless, customers don't seem ready to take the long view. "People are happy to fix for two or five, maybe even 10 years, but 25 years is a long time – who knows where they will be or what they will be doing?" asks Melanie Bien at broker Savills Private Finance. "It's all very good the Chancellor saying we should have more 25-year fixes, but if people don't want them, the market won't supply them."
However, critics say brokers dislike long-term fixes because, if they take off, fewer people will use their services to remortgage.
"Undoubtedly, some are reluctant to recommend long term, but the rules say they are supposed to do what's best for the client," says Ray Boulger from broking firm Charcol.
"Generally, though, brokers and their clients don't think it's a good idea to fix for so long. Two years at what turns out to be an uncompetitive rate doesn't do too much damage, but with a long-term fix you either have to stick with it or pay a redemption charge."
Rather mischievously, Mr Boulger adds that the newly nationalised Northern Rock could hold the key to realising the Government's vision. "The Rock was a leading light in this market but has become very uncompetitive, charging 6.69 per cent on a 15-year fix. If the Chancellor is so keen on this market, perhaps he ought to start the reforms closer to home."
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