The end of a 25-year affair: Mortgages are changing to take account of real life today, explains Anne Spackman

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The Independent Online
The social upheavals that have shattered our certainties about marriage and employment are about to produce an after-shock in another British institution. The traditional 25-year mortgage, based on the notion that marriages and jobs are for life, is heading for early retirement. In its place will arise a number of flexible packages designed to reflect the financial realities of life for today's workers.

This is not just a matter of fluctuating monthly repayments - we have grown all too used to those boom-to-bust years of see-sawing interest rates.

Rather, it is an institutional recognition that the pattern of our lives has irrevocably changed and that our biggest financial commitment must change with it.

The chief catalyst is change in the structure of work. Today there are more two-income families and no-income families than one-income families. The idea of working 48 hours a week for 48 years of your life is already looked back on with nostalgia. Many people can expect to earn more in their twenties and early thirties than in their forties and fifties. In a very short period of time most of the post-war expectations that governed people's attitudes to their earning years have gone.

Instead we have a labour market in which part-time work is growing, jobs are on short contracts rather than for life, and performance-related pay means incomes can go down as well as up. Many who set out on seemingly secure white-collar careers have experienced the shock of unemployment - if only for a short period of time. During these upheavals the thing that weighs most heavily on people's minds is how they are going to pay the mortgage.

A briefing paper was sent to lenders recently by Adrian Coles, director-general of the Council of Mortgage Lenders. It pointed out that working patterns were changing fast and mortgages would have to adapt to suit them. Many of the shrewdest minds in the building societies have come to the same conclusion. They are busy producing mortgage schemes better adapted to people's needs - and which they will be able to understand.

Flexibility is the buzzword. No one is suggesting your largest personal debt will become your flexible friend, nor that it will cost any less. But there is a view that a mortgage, like any other cost, should match people's income more coherently than it does at present.

Mr Coles has floated a number of ideas. Borrowers could postpone the discounts, offered at the start of a mortgage, to coincide instead with the birth of their first child. They could opt to make higher repayments during periods of work in order to earn a mortgage 'holiday', should they become temporarily unemployed. Similarly, borrowers whose income is based to a large extent on commission or bonuses might contract to pay a certain amount every year, rather than every month. The new schemes are all part of a broader strategy that assumes individuals will take increasing personal control of their financial affairs.

Instead of cementing the mortgage into the centre of the family finances and organising everything else around it, the mortgage would become one of a number of financial contracts, such as a pension or life insurance, which have to be periodically reviewed. In a sense this has already begun to happen, with the high take-up of short-term fixed-rate mortgages and remortgages. Borrowers are entering into limited-period contracts with lenders, rather than promising them a 25-year relationship. Sophisticated mortgage buyers are used to the idea that they can shop around for the best mortgage deal in the same way they would expect to for a new car.

The new thinking is predicated on two assumptions. One is that inflation will remain low; the second that interest rates will remain stable. It is also based on a belief that our financial habits are changing: after the reckless period of the late Eighties, we are entering a phase of caution in which people will limit their borrowings and rediscover the value of savings.

Some analysts feel the recession has already convinced people of the need to save in order to provide their own insurance for a rainy day. There is little evidence so far to suggest that first-time buyers are doing so. The deposits they are putting down are only slightly larger than they were in the heyday of 100 per cent mortgages five years ago.

Among older buyers, the experience or fear of redundancy may be a strong enough spur for increased savings. It may also persuade people of the merits of paying more than they have to when the going is good; this will be vital if borrowers are to 'earn' mortgage holidays.

Schemes that combine a mortgage in one large saving-and-borrowing package are a top priority in the research department at the Halifax Building Society. Gary Marsh, head of corporate affairs at the Halifax, has no doubt the traditional 25-year mortgage has had its day. This month the Halifax introduced a 'Mortgage to Match' service, whereby borrowers can choose to split their loan between variable and fixed rates. This allows borrowers flexibility as to how fast they want to repay their loan, and at what price.

It is tailored to fit each individual's actual and anticipated financial circumstances.

With Halifax Life - a new financial services wing - being prepared for launch in three months' time, the society is hoping its reputation in the housing market will persuade people to sign up for a single package deal of saving and borrowing.

Other societies and banks are also making their mortgage schemes more flexible. The National and Provincial, which, like most lenders, offers borrowers a discount at the start of a loan, now says the discount can be deferred to a later date. The Yorkshire and Clydesdale banks will let you make some larger-than-necessary repayments, immediately credited to your account.

This is partly enlightened self-interest. The housing market is slow, home ownership has almost certainly peaked and the fall in the birth rate in the Seventies will affect the next generation of first-time buyers. Banks and building societies need to expand the range of goodies on sale.

One group that has long hankered after this kind of flexible arrangement is the growing band of the self-employed. Mr Coles's mortgage paper points out that they will form an ever larger sector of the workforce (just over 10 per cent at the end of 1993). Do flexible mortgages mean they will be treated a little more sympathetically in the future?

The answer is no. The new mortgages will ultimately be available to the self- employed, as to everyone else, but only after they have proved their credit-worthiness over a period of time. No matter how solid their previous income, nor how closely it is related to their present work, if they go it alone, they will start off at level zero.

The lenders want to offer us packages that suit the new working world, but not at a risk to themselves.

(Photograph omitted)