No Rush For Long Term Fixes

Chancellor Alistair Darling’s proposal to make it easier for providers to fund 10-year fixed rate mortgages has been met with a lukewarm welcome by experts.

Most borrowers have chosen two or three year fixed rate deals, but in the face of rising interest rates, the Government believed that borrowers would be keen to be tied in to known regular monthly repayments for longer periods, which would also help to stabilise the market.

Currently there are about 30 lenders offering fixed-rate deals for ten years or more. However, Halifax bank and Britannia, Norwich & Peterborough and West Bromwich building societies have found that take-up has been low.

One of the problems is that rates on long-term fixes are not so attractive, so borrowers are put off straight away. Another problem is that if borrowers want to end the deal before the period (ten years) is up, then they face escape penalty charges.

Director of independent mortgage broker Savills Private Finance, Melanie Bien, said: “Long-term fixes have been around for years, but have proved unpopular. However, rates have fallen and lenders have looked at ways of reducing early redemption charges, making them more flexible and more attractive.”

Malcolm Waldron of London estate agent Kinleigh Folkard & Hayward, says there are some benefits in longer deals. He said: “It is difficult to argue against the virtues of a long-term fixed mortgage in terms of the financial security it offers homeowners. Assuming financial stability, if a mortgage is affordable for a buyer when it is first fixed, it should still be affordable throughout the term whether that be two, five or 10 years.”

Of course the benefits of a long-term fixed deal depend on the interest rate at the time, and now may not be the best. When Mr Brown and Mr Darling first brought this idea to the fore, interest rates were on their way and seemed destined to go further. Now, however, with a number of things having happened (sub-prime crisis in US, Northern Rock, credit crisis, falling inflation, falling consumer confidence), it appears that interest rates may have peaked. Thus, it would not seem to be the right time to fix your mortgage interest rate.

Last week mortgage broker London & Country launched a 30-year loan fixed at 5.99%. It has no early repayment charges, but there is a potentially expensive set-up fee of 2%.