FOOL'S EYE VIEW
Getting Fixed For 25 Years

By Jane Mack (TMFJane)
November 25, 2003

At the end of this week, the Leeds & Holbeck Building Society will re-launch its 25-year fixed rate mortgage. Along with the Cheshire Building Society, who also offer a long-term fixed rate mortgage, it's hoping the market is now ready to embrace the concept of a life-time fix.

But is it ready?

The Chancellor, Gordon Brown, wants a less volatile housing market which he blames for many of the ups and downs of the economy over the last fifty years. He believes that long term fixed rates would ensure that it is less sensitive to changes in the Bank of England base rate and earlier this year he commissioned a study to examine the issue. The report is due to be published on 10th December – the day of his pre-budget speech.

Long-term fixed mortgage rates are common in the United States – in fact, 60% of homeowners there have them. However, they're backed by government guarantees which makes them cheaper. The few products we have in the UK are not so they're often expensive and/or inflexible. After all, lenders are taking just as much of a guess on long-term interest rates as the rest of us.

However, last week five of Europe's major mortgage lenders suggested setting up a new agency to provide penalty-free loans for up to 30 years throughout the EU. It would be modelled on the Fannie Mae agency in the US which is able to offer comparatively cheap home loans because of its implicit government backing. If the EU was prepared to back the proposed European Mortgage Finance Agency, we may be more inclined to go for long-term fixed rate mortgages.

The way it would work like this:

By banding together, mortgage lenders could borrow money from major investors in the financial markets more cheaply before lending it out to consumers in the form of home loans. The investors are given a guarantee that the mortgages will be repaid and since this guarantee would be too good to miss, they'd be keen to invest in what would effectively be a quasi-government body.

The European agency would have to persuade the EU governments to back the mortgages and they're only going to do that if it gives them a benefit i.e.: an economy that is not governed by a volatile housing market.

Nevertheless, interest rates could still be between 6.5 and 7% - mainly because of the lack of penalties - which is rather expensive compared to current deals on the UK market.

The two deals on offer from Leeds & Holbeck and Cheshire are cheaper because they have lock-in periods.

Leeds & Holbeck have set their interest rate at 5.99% with borrowers being given "option windows" to redeem or transfer without penalty after five years and then every two years thereafter. Up to 5% of the capital can also be repaid every year, without penalty.

Cheshire's 25-year fixed rate mortgage has interest rates ranging from 5.48% to 5.58% depending on how much of a deposit you've got. It's fully portable and offers annual windows in years 6, 8, 10, 12, 14, 16 and 18 when the loan can be repaid without penalty.

I have to say that I have mixed views about long-term fixed rates. While they do provide certainty and stability, you pay the price for it in the form of higher interest rates and, currently, a lack of freedom outside the option windows. Personally, I think I'd plump for freedom and cheaper rates but if money was very tight I might think differently.

Find out more about Mortgages.