Buyers should lock into the best mortgage now

Demand for the 25-year, fixed-rate deal is rising, says Stephen Pritchard. New homeowners will know exactly what they'll pay, but there can be penalties

Last week's surprise cut in interest rates has taken the Bank of England's base rate – and with it, mortgages – to levels not seen since 1955. But borrowers with longer memories will remember that 10 years ago Britain was forced out of the European exchange rate mechanism, and interest rates leapt overnight.

Few economists think that such a massive rate rise will happen again soon; in fact, the Bank of England could well make a further quarter-point cut, to 3.5 per cent.

Borrowers are tempted to lock into low mortgage rates now. Moneyfacts, the financial researchers, says homeowners prepared to fix their mortgage can pick up attractive deals. West Bromwich Building Society is offering a two-year fix below base rate at 3.74 per cent. Leeds and Holbeck has a three-year fixed mortgage at 3.99, and Portman has a similar deal at 4.14 per cent. All are available for loans of up to 95 per cent of a property's value.

Five-year deals are less affected by base-rate changes, and rates now are a little higher than at the end of last year. The broker London & Country suggests Britannia at 4.34 per cent, or Newcastle Building Society at 4.35 per cent.

These loans offer a good measure of security, but there is growing interest in very long-term fixed deals. Cheshire Building Society launched a 25-year fixed-rate mortgage last year, with rates of 5.79 to 5.89 per cent, depending on the size of the loan. "Early signs are that take-up is as good as for five- to 10-year fixed rates," Bob Gratton, the society's senior product manager, says. "It is not just a gimmick, but a test of the marketplace."

The Cheshire mortgage offers a fixed rate for the whole of the mortgage term, so the mortgage has to be for 25 years. But borrowers have a penalty-free redemption window every two years, after the first seven years of the loan, and can switch the mortgage to a different property.

The Cheshire is taking advantage of the City's low long-term swap rates to offer a long-term fix. The only other bank to have a 25-year deal is Standard Life, starting at the higher rate of 6.49 per cent.

Several lenders offer 15-year fixed-rate mortgages, including Northern Rock, which starts at 5.29 per cent for mortgages of up to 85 per cent. But the strongest growth has been in 10-year fixed-rate deals where rates can be as good as those for five-year fixed-rate loans, and carry fewer restrictions. Some 15-year fixes require borrowers to pay off the mortgage in full after 15 years, so they will not suit everyone.

"Ten-year deals have proliferated because swap rates have fallen, so lenders can offer loans at levels that look attractive," Ray Boulger, senior technical manager at the mortgage broker Charcol, says. "Lenders can offer 10-year fixed rates below their standard variable rates. The premium for a longer-term fix is a lot lower than it has been."

Longer-term fixed mortgages appeal to borrowers who remember the high interest rates of the early Nineties, who are borrowing relatively large sums, or who expect to be staying in the property for some time and want the certainty of knowing their outgoings.

Marion Weatherhead, a consultant and chartered surveyor, recently remortgaged to a 10-year fixed-rate loan with the Newcastle Building Society, through Charcol. Ms Weatherhead originally had a shorter-term fixed mortgage, and an additional advance for refurbishment work on her house, a three-bedroom semi-detached in east London. When she remortgaged, she put both loans together and borrowed more to to finish the work on her house.

"It is a sum I can afford on present interest rates, but I remember when rates were two or even three times what they are now," Ms Weatherhead says. "I would not want to get caught up in that. What I pay now is comfortable."

If rates were to rise, Ms Weatherhead would have less money. At the same time, she wanted to spend money on her house now so she could benefit from the improvements, rather than saving the money before doing the work.

"I thought it was worth a higher mortgage sum to have what I want now and to be able to enjoy my home to the full," Ms Weatherhead says. "The amount is a little high but fine at present rates. If I had to have a variable mortgage I might not have had so high a loan. It is risk-management: I can take the risk borrowing the extra money, as long as I'm not taking a risk on the interest rates."

Under the terms of her mortgage, Ms Weatherhead can redeem the loan in October of each year at a minimal cost. Mortgage experts caution borrowers attracted to longer-term fixed rate deals to beware of restrictive terms and penalties.

David Hollingworth, mortgage adviser at London and Country, warns that long-term deals can mean long-term penalty clauses. "Often, with longer fixed rates there are penalties for the whole of the fixed periods," he says. "It is an attractive proposition for the lender to have you on their books for 10 or more years."

In extreme cases, mortgages with long-term fixes can have penalties as high as a year's interest. This means that homeowners who think they might either want to move, or to pay off all or part of their loans, could be better off with a couple of short fixed-rate deals.

Charcol's Mr Boulger says a borrower taking a mortgage with a shorter-term fixed rate could see interest rates rise in a few years, and still not be worse off. "Instead of taking a two-year mortgage you could take a cheaper, shorter-term deal now, and remortgage in 10 years," he says. "Even if you paid 6 per cent when you remortgaged you would be no worse off, and you would gain flexibility."