Will the long-term fixed-rate mortgage catch on with the British homeowner?

For those who remember the swingeing home loans of the Eighties, setting payments for 25 years has virtues. But lenders say there is no demand
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The Independent Online

By Rachel Stevenson

The British love-affair with variable rate mortgages was cited as one of the Chancellor's main reasons for delaying the decision to enter the European single currency. But Gordon Brown is keen to establish long-term, fixed-rate mortgages believing they will bring more stability to the market and security to borrowers.

Six of 10 mortgages in the UK are on a variable rate and mortgage lenders are so competitive they constantly cut rates to offer the cheapest short-term interest deal they can. With the Bank of England base rate at an historically low 3.75 per cent, short-term mortgage rates can be picked up for as low as 3.35 per cent.

But this means the UK is more sensitive to interest-rate changes than in Europe, hence the Chancellor's reluctance to throw Britain's homeowners head first in to volatile eurozone interest rates and his desire to get borrowers on a longer-term rate. This would give people security should interest rates start to rise.

Mr Brown certainly has Becky Fogden convinced. Ms Fogden, 42, last bought a flat 12 years ago but as a recent divorcée, she has been thrown back on the property path.

"I can't see that interest rates are going to go much lower than they are, but they could go a lot higher," she says. "We just don't know what will happen in 10, 20 years, or what sort of Government we will have, but I worry that rates are more likely to start going back up than down. But with a 25-year fixed-rate mortgage I know I will be paying exactly the same amount every month. My salary is likely to go up, but I know my mortgage payments won't rise with it. That's the kind of protection and peace of mind I want."

Many homeowners will remember, as does Ms Fogden interest rates of 15 per cent or more in the late Eighties, when mortgage repayments suddenly soared.

But while fixed-rate terms of two, three and five years are common, there is little on offer for 10, 15, and 25 years. Interest is growing and Mr Brown has support from Halifax, the UK's largest mortgage lender. This week a spokesman said there was room for long-term fixed rates, although it would not be the "miracle cure" for stabilising the housing market.

Philip Hanson, the general manager of mortgages at Halifax, says: "Our research shows the main long-term driver of UK house-price growth is the level of employment; for this reason it is difficult to see how greater emphasis on long-term products could act as a brake on house-price growth. A long-term fixed rate market should supplement the existing one."

Lenders such as Abbey National, Northern Rock and Britannia Building Society offer 10- and 15-year fixed rates. But two small building societies are so far leading the market in 25-year rates. Cheshire Building Society launched a 25-year, fixed-rate deal in August last year, before the Chancellor had expressed his interest in the products.

Jason Gaunt, marketing director at Cheshire, says: "We firmly believe there is a growing requirement for a greater range of mortgage products, particularly when the possibility of joining the single European currency is being explored. The Chancellor agrees long-range fixed rate mortgages will offer mortgage holders stability."

The company yesterday reduced the rates on its 25-year deal to 5.14 per cent from 5.49 per cent, in response to rising competition and also introduced 15-year and 20-year products. Leeds & Holbeck Building Society last month launched a rival product, fixed at 5.39 per cent for 25 years. This was the deal that caught Ms Fogden's eye. She wants to buy a one-bedroom flat in London and has been searching the market for a good mortgage deal.

"A friend spotted a new 25-year fixed rate deal from Leeds & Holbeck on the internet and said I should take a look," Ms Fogden, an administrative assistant for the RNIB, says. "It seems to offer me everything I want, protection and security that my mortgage repayments won't rise for the next 25 years."

Over the past 15 years, the average building society mortgage rate has been 10.1 per cent, the Leeds & Holbeck says, which has led Ms Fogden to believe she is getting a very good deal. But long-term mortgages have not been popular with borrowers. Ray Boulger, mortgage expert at the broker Charcol, thinks 25-year deals will never spread far in the UK while short-term rates remain so low.

"The last time long-term fixed rate deals were attractive was in 1990, when they were on the market at 11.9 per cent and short-term rates were above 15 per cent," Mr Boulger says. "Today you have to have real concerns there will be a complete change in the country's economic environment and that interest rates are going to go up significantly. Demand for these types of mortgages is going to remain subdued while people can see deals of 3 per cent on offer in the short-term."

The present low interest rate means that even people who locked themselves in to fixed rates a few years ago have watched variable rates fall while their repayments have stayed unchanged.

"For most people, it is just not suitable to lock in to a 25- year rate," David Hollingworth, at the broker London & Country, says. "It may give you some stability, but you are stuck with it and at present, the long-term rates are too high compared to the variable deals on offer. Most people want to take a short-term view and look again their situation in a few years. They can remortgage much more easily if things have changed."

Borrowers have also been put off by high redemption charges some lenders have levied in exchange for the long-term security of a 25-year fixed rate. Mr Hollingworth points to the 10-year deal on the market from Britannia at 4.79 per cent. It charges 360 days' interest at whatever the standard variable rate is at the time to customers who want to cash in. "This can amount to thousands of pounds to some people," Mr Hollingworth says. "These penalties can be a big hurdle."

Leeds & Holbeck and Cheshire have tried to get around some of these problems by allowing penalty-free redemption periods. Leeds & Holbeck, for example, can be redeemed after five years, then every two years after that, free of charge.

Long-term fixed-rates are certainly becoming more flexible and if you think interest rates are likely to start heading up, a long term fixed rate will give you the peace of mind that you will not have to pay a penny more on your repayments. But many people are more comfortable planning their borrowings on a time scale of no more than five years ahead and are reluctant to lock themselves in for the long-term. Unless your house financing arrangements are definitely to remain unchanged for the next 25 years, short-term deals are always likely to win the day.

What's on offer for 25 years


* 5.39 per cent fixed for up to 25 years;

* 5 per cent capital repayments allowed each year without penalty;

* Fully portable;

* Three-month window in year five, and each subsequent two years in which to redeem or transfer without penalty;

* Maximum loan to value of 90 per cent;

* Only 10 mortgages completed since launch last month, although had more than 300 enquiries;

* Call 08450 50 50 62 or www.leeds-holbeck.co.uk


* 5.14 per cent for 80 per cent loan to value;

* 5.24 per cent for 95 per cent loan to value;

* £5,000 overpayment a year allowed;

* No redemption penalties in the last five years;

* Fully portable;

* Only 100 completed since launch in August

* Call 08450 55 45 67 or go to www.thecheshire.co.uk

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