Homebuyers still giving short shrift to the long mortgages

The Chancellor likes the idea of stabilising the housing market with 25-year, fixed-rate loans, says William Kay. But when Japan tried 100-year ones, prices soared

The 25-year fixed-rate mortgage, now the preserve of Cheshire Building Society, could soon be back on the shopping lists of UK borrowers, if the Chancellor has his way. But continuing low interest rates may do the job for him.

In his Budget, Gordon Brown said: "With housing demand at historically high levels, supply has remained low. This has contributed not just to, over 30 years, a rate of growth in house prices three times that of Germany and France, but to the volatility and inflexibility of the housing market as a whole. Indeed, most stop-go problems that Britain has suffered in the past 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market."

So he has commissioned David Miles, professor of finance at Imperial College, London, to look at whether long-term, fixed-rate mortgage could be encouraged. Professor Miles is to deliver an interim report in the autumn and his final verdict by next year's Budget. Euro cynics have noted that long-term, fixed-rate mortgages are more popular on the Continent, and would be more compatible with membership of the euro zone, where one interest rate prevails.

Long-term, fixed-rate mortgages were widespread in Britain in the Fifties and Sixties, as home ownership spread but competition among lenders was low. The mortgages were abandoned when inflation and interest rates took off in the Seventies, and now would look out of place to many borrowers in a market characterised by remortgaging as people chase the latest best deal.

Although most mortgages in other countries are at fixed rates, nearly two-thirds of new UK mortgages are at short-term variable rates, with most of the rest fixed for less than five years. Long-term mortgages can be expensive to get out of, as borrowers found in the past decade when they tried to escape from ones fixed at 10 per cent while market rates were falling.

"Borrowers don't like being locked in by heavy penalties for long periods," David Hollingworth, mortgage specialist at the no-fee broker London and County, says. "You never know what's round the corner. A borrower unexpectedly forced to move home or end a relationship, for instance, could be hit by a redemption penalty of thousands of pounds. Even if the deal is portable, the existing lender may not be able to accommodate the new borrowing requirements, making the penalty payment inevitable. In addition, long-term rates are higher than those fixed for one to five years, and in the recent falling rate environment, discounts and trackers are likely to continue to catch the borrower's eye."

The 133-year-old Cheshire Building Society, in Macclesfield, imposes penalties on anyone cashing in their 25-year fixed mortgage in the first seven years, which covers the time when most people move house. Standard Life withdrew a 25-year mortgage where the interest rate was capped rather than fixed, and tied the borrower in for only five years.

John Barber, Cheshire's spokes-man, said: "We have had 125 applications since we started offering this mortgage last August, so it hasn't been tremendously popular. People have a variety of reasons for wanting a 25-year fix, but it's largely because they know they are going to be reasonably stable for some time and want certainty on what they are going to be paying."

Half the Cheshire's applications have been for house purchase and half for remortgage. The average age of applicants is 40, giving them a reasonable chance of completing the term before retirement. The typical loan application has been for £100,000, 60 per cent of the properties' value.

Sheila McKechnie, director of Consumers' Association, said: "Anything that enables greater certainty in financial planning is to be welcomed. But this will not be easy to deliver in practice because the industry has struggled to deliver fixed-rate products that combine certainty with flexibility, instead using huge redemption penalties to lock consumers into expensive mortgages."

Low interest rates have encouraged demand for five- and 10-year fixed-rate mortgages, which are at their lowest for years. Ray Boulger, senior technical manager at Charcol, mortgage broking arm of Bradford and Bingley, says: "The Chancellor needs to proceed with caution. He is clearly proud of the UK's culture of home ownership. He needs to recognise this positive culture is directly related to the world-class competition and innovation of the mortgage market. It is unclear how development of a long-term, fixed-rate mortgage market will help the demand problem. It will not build more houses.

"Volatility in the housing market has been most closely associated with sharp movements in interest rates. Given the Chancellor's confidence in the Bank of England monetary policy committee's management of monetary policy and setting of base rate, logically this should be a lessening concern for the Chancellor.

"The demand for long-term fixes is growing already, through the natural course of interest-rate levels. We have already seen this year record low five- and 10-year fixed rates. Leaving it to market forces to dictate demand is the best course. There are thousands of mortgages for thousands of needs. In the interests of fairness and flexibility for the UK mortgage borrower, the Chancellor should ensure it is kept that way."

Capped rather than fixed long-term mortgages may be best, because they give the borrower the benefit of cuts in interest rates. But if you think a 25- or 30-year mortgage is stretching a bit far, in Japan they have 100-year ones, introduced because prices there had got so high many people could not afford homes. Ironically, despite Mr Brown's view that long mortgages help stabilise housing markets, the 100-year mortgage that gives more people access to finance has actually added to the house-price boom there.

Case study: 'Now we know where we stand'

Trevor and Julie Williams were almost overwhelmed by financial problems when they came across Cheshire Building Society's 25-year mortgage fixed at only 4.79 per cent.

"We had had a mortgage with Halifax since we were married but we did a lot of shopping around," says Mrs Williams, 41, an early-years teacher at a pre-school. "The Cheshire was a good deal because it compared well with other societies offering lesser terms. And it meant we could cut our debts to the mortgage and utilities and now we know where we stand."

Mr and Mrs Williams have a three-bedroom semi-detached house in Poynton, Cheshire, where they live with their three sons, Adam, 11, Ryan, eight, and Ben, five. The mortgage is for £60,000 but the house is worth £160,000.

"We're not thinking of moving, but we do want an extension because our children won't want to share a bedroom when they get older."

Mr Williams, a joiner, is 47 so, in theory, he would be 72 by the time their mortgage was paid off. "We know we can pay it off without penalty from seven years onwards," Mrs Williams says. "We hope to collect a windfall, such as an inheritance, to do that well before the 25 years are up."