Reforms to popularise long-term fixed-rates

The Government is pursuing its campaign to promote long-term fixed-rate mortgages, which have never been popular in the UK but are common-place in the US and across much of Europe.

The Chancellor of the Exchequer, Alistair Darling, believes that greater take-up among UK home owners is the key to housing market stability and he plans to encourage lenders in providing this kind of loan.

Currently, around 30 lenders offer loans with fixed-rate terms of ten years or more, but borrowers are wary of the large exit fees that are attached to most such arrangements.

The Government will introduce reforms in 2008, making it easier for lenders to finance long-term fixed rate loans, through covered bonds.

According to Ray Boulger, senior technical manager at John Charcol, the mortgage broker, more covered bonds need to be issued in sterling, as these will be attractive to investors, such as pension funds.

However, Mr Boulger believes that lenders will continue to find it difficult to attract borrowers with long-term fixed rates; a 25-year fixed rate mortgage will only be attractive to a borrower if the interest rate is below that of a shorter-term offer, and this is difficult to achieve.

There is also the problem of such a loan being less adaptable to changing lifestyles.

The Council for Mortgage Lenders has stated that if the Government is to be successful in its promotion of this kind of borrowing providers will have to “stimulate mainstream consumer appetite”.

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