30-year fixed rate mortgages

In the Spring budget the Chancellor commissioned research on how the UK could 'develop a market for long-term fixed rates'. He wants the UK to take advantage of the same type of 25 and 30 year fixed rate loans which are popular in the US and other parts of Europe. But will they bring more harm than good and are Brits ready for a 'mortgage for life'?

When base rates were tumbling to record lows, record highs were seen in the take up of fixed rate mortgage deals. Everyone wanted to fill their boots with a low-low rate to give them peace of mind when the base rate started rising. In fact, the take-up of fixed rate mortgages has more than doubled in the last year. Figures from the Council of Mortgage Lenders (CML) show that in July 2003 alone, 55% of home loans were fixed rate - the highest on record. The average fixed rate was 4.12% against an average 3.96% variable rate.

Fixing for two or five years is one thing. But are you ready to fix for 25 or 30? Gordon Brown says mortgages running for such lifelong terms will help avoid the dreaded 'boom and bust' economy cycle. But is his real motive more political? His Budget speech revealed his worries over the structure of the domestic mortgage market as he delivered his verdict on his five economic tests for entry into the euro. He criticised the current system which provides relatively short-term fixed mortgage deals, arguing it made the UK sensitive to interest rate changes both by the European Central Bank and the Bank of England. 'Compared with other large euro area countries, household finances in the UK are relatively sensitive to changes in short-term interest rates,' he said. It is true that in countries like Germany, the majority of home loans are long term deals, whereas ours tend to be shorter and more flexible.

So is the American dream may soon be a reality in the UK? Mortgage brokers London & Country’s financial survey of 2003 reveals that the concept of long term fixed rates seems popular, with two thirds of respondents indicating they like the idea. David Hollingworth of L&C says: "Clearly, narrowing the gap between the desirability and the suitability of these products will need to be a high priority for the Chancellor. In their current format long term fixed rates do not fit the bill." Research from KPMG also suggests that consumer opinion is changing. It found that 60% of mortgage holders would be likely to take out a long-term fixed-rate loan, and more than 40% of them would even be willing to pay a set-up fee of up to 2% in return for a competitive interest rate.

Michael Coogan, Director General of the CML is unconvinced: "It is unlikely that the market can deliver long-term fixed-rate mortgage products that are attractive to UK consumers, as the Chancellor of the Exchequer has advocated, without the introduction of significant Government incentives to encourage borrowers to take them out."

The fundamental problem in developing a market for long term fixed rates in the UK is how to make these deals competitive enough to entice borrowers onto them. Leeds & Holbeck Building Society tested the water in May 2003 when it launched a 25 year mortgage with the rate fixed at 5.6%. It has since been withdrawn. Flexibility is also key. Northern Rock, along with two major European banks are said to be offering support to the idea of setting up a European Mortgage Finance Agency (EMFA) to promote 30-year fixed rate loans without early redemption penalties. It is these tie-ins which have traditionally made many fixed deals unappealing to borrowers.

It seems that the EMFA looks set to overcome that hurdle when it launches its first products in around two years time. Now it just needs to work on its pricing. 'The proposed interest rates of 6.5 to 7% - are just too high-priced,' says David Bitner of The MarketPlace, Bradford & Bingley. 'Borrowing £100,000 on a repayment basis over 25 years on a fixed rate of 7% for the life of the loan would mean paying £706.78 per month. Compare that to a life time tracker at 0.5% above the Bank of England base rate where they would be paying just £541.74 per month, it become startlingly clear what a borrower would opt for,' he adds.
According to Building Societies Association statistics, over the last 25 years the average building society mortgage rate has been 10.1%, with this rate rising as high as 15.25% in 1990. Ouch.

'The real lesson,' says Ray Boulger of Charcol, 'Is that there are pros and cons to every market type and you can't expect to transfer all the best bits from one system to the best bits of another without either losing something valuable or incurring a new cost.'
Wow, where do you work? Very imformative, cheers. I think I would go for a longterm fixed rate mortgage if funnilly enough, the rate were relatively low and there was no early redemption penalties. The key is 'relatively low'. How do you select a rate that is not so high now that it scares off customers or so low that if rates go to an average of say 9% for the next 25 years, the banks won't go bust having lent billions at 4.5%. (Hope that makes sense!)

I currently have a 2 year fixed rate mortgage, which was a bit annoying as after I got it rates fell to historiacal lows. It now looks like rates are climbing slowly, maybe a whole percent by end 2004 isn't impossible, so I'm looking at switching mortagages when the two years are up in a few months and fixing again for say another two years. Its impossible to see into the future further than that and I guess that's what may put customers off 30 year fixed rate mortgages. They'll be good for some people and not for others. I'd recomend talking to an independant mortgage adviser. They're not on massive commissions any more and its difficult for them to missell you cr*p products, so they're trustworthy. Just make sure they are independant as then they can off you mortgages from all providers and not just the one that say a NatWest mortgage adviser will be able to sell you.
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