Battered home buyers flock for a fix: Deals that guarantee a set interest rate are being snapped up despite expensive conditions. Vivien Goldsmith reports

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The Independent Online
THESE days, it seems, everyone wants to get into a fix when it comes to house-buying. More than half the new mortgages being taken out at the moment are fixed-rate deals.

For householders who have endured the roller-coaster of mortgage rates over the past quarter of a century, the fix has undoubted attractions.

The average mortgage rate over the past 25 years was 11.1 per cent; over the past 10 it was 12.1 per cent. Now banks will fix the rate at 8.99 per cent for 10 years and 9.75 per cent for a loan that will last a generation.

Fixed rates can be looked at in two ways - as a calculated bet on beating rising interest rates, or as an insurance policy against rising rates. The horror of seeing interest rates rocket to 15.4 per cent and once-manageable monthly payments hit undreamed-of highs has been stamped indelibly on the minds of many borrowers, who are now willing to plump for a fixed rate - even if it means missing out on a further drop in rates.

A pounds 60,000 repayment loan with Nationwide at the current variable rate of 7.99 per cent would cost pounds 420.44 a month. If rates went to 11 per cent, payments would rise to pounds 526.62; a leap to 15 per cent would put the monthly payments up by more than pounds 260 to pounds 680.66.

The idea of taking a fixed rate has been slowly creeping up on home buyers, even when faced with the costs it involves. Those who are not moving house face valuation and legal fees on a sliding scale acording to the value of the property, which can mount up to several hundred pounds, as well as the customary arrangement fee, typically pounds 250. But established home owners are still beginning to think it is worth taking action to fix their interest rate.

With the property market still sluggish, there are not huge numbers of fresh home buyers. But first-time property owners too are beginning to recognise the perils of trusting their fate to fluctuating interest rates. Some lenders offer first-time buyers special deals, although these are often short fixes of one or two years.

Certainly the trend is finding favour with mortgage seekers. 'Customers are asking us to fix their mortgage payments for longer periods of time, to ensure that monthly household budgets can be set in advance and for peace of mind,' said Peter Wood, Abbey National's mortgage marketing manager.

Abbey's current longest-term offering stretches to January 2000 and pegs the rate at 8.99 per cent. The shortest is for less than two years at 6.75 per cent.

Fixed-rate loans lasting for 25 years have been around for some time. Eagle Star, for instance, had one at 11.5 per cent on offer in 1973. The drawback was that a non-profit endowment policy - not a particularly attractive investment - had to be taken out to repay the loan. In the US, they have long been the rule rather than the exception for home buyers.

At the forefront of the new wave of long-term loans is Lloyds Bank, which has just launched its first 25-year mortgage fixed at 9.75 per cent. The reception has exceeded the bank's wildest expectations. 'It's selling like hot cakes,' a spokeswoman said. Lloyds also has 10-year loans pegged at 8.99 per cent and five-year fixes at 7.99 per cent.

Phil Nunnerley, assistant general manager, UK retail banking, says the bank has enough fixed-rate funds to last for several weeks - unless something dramatic happens on the interest rate front. It protects itself from a fall in interest rates and being left with uncompetitive funds by hedging its position in the money markets.

The catch is that Lloyds supplements its income on the mortgage by insisting that new buyers take out a Black Horse Life endowment or pension to back their interest-only mortgage. Other borrowers must top up existing payment means with one of Lloyds' own products. 'As a total package with attached commission earnings we get a satisfactory return,' Mr Nunnerley said.

But elsewhere there is a trend away from mortgage lenders insisting on borrowers taking tied products. 'The requirements to take the lender's buildings and contents policies are being relaxed,' said Caroline Blackman, a director with the mortgage brokers John Charcol, which are doing 80 per cent of loans at fixed rates.

Abbey National and Halifax, for instance, no longer insist on in-house insurance. Many lenders such as Cheltenham & Gloucester, Halifax, Nationwide, Northern Rock, and North of England have also dropped the requirement to take out a commission-earning endowment or pension, and will allow straight repayment mortgages to be taken at fixed rates.

As usual with heavily advertised offers of financial products, the details behind the headlines bear examination - compulsory insurance can inflate the overall cost, as can redemption penalties. If interest rates take a nosedive - hard to imagine after the falls of recent months - current historically cheap rates could just end up looking expensive.

There are still many home owners around who felt smug not so long ago when they fixed their mortgages at around 10 per cent and feel rather angry now.

The cost of unwinding a mistake can be high. Lloyds charges three months' interest on two and five-year fixed loans, six months' on 10-year loans, and a stiff 10 months' interest on 25-year loans. These penalties, which take no account of how long the loan has been running, can easily wipe out the gain from ditching the fixed rate. The price of peace of mind is not always worth paying.

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