BUDGET 2008: Long-term fixed rate mortgages

The chancellor once again expressed his desire to make long-term fixed rate mortgages more popular amongst borrowers.

According to the Government, these deals can reduce some of the risks of taking out a mortgage and can “help more people get on - and stay on - the housing ladder”.

The truth is that the Government has been trying to encourage take-up of these deals for some time.  In 2004, Gordon Brown published the Miles Review of the UK mortgage market, which looked at ways to improve the market for longer-term deals.  And in July last year, Chancellor Darling announced measures to help lenders finance more affordable long-term fixed rates.

But despite these efforts, long-tem fixed rates just haven’t caught on with borrowers – according the CML, Perhaps 3% of new mortgages in 2006 and 2007 were on rates fixed for 10 years or more.

The reason for this, we believe, is that there hasn’t been enough focus on what consumers are actually looking for from these products.  In his budget speech for example, the Chancellor said, “I (also) want more people to have the choice of long term fixed rate mortgages".  However the problem is not about choice – there are plenty of long-term fixed rates on the market.  The problem is that borrowers just simply don’t like tying themselves in for the long-term. 

The Chancellor went on to say that long-term fixed rates offer borrowers the “flexibility to move, or get a new mortgage if rates go down.”, but most of them tie borrowers in with Early Repayment Charges (ERCs).  Borrowers could switch to a new mortgage, but it may cost them thousands of pounds in charges to do so.  What borrowers need are long-term fixed rates that are flexible and offer a viable alternative to the more popular short-term deals. 

Last year London and Country conducted research into long-term fixed rates.  48% of its customers they would consider a 25-year fixed rate, however 68% of those said they would be able to stomach ERCs for no more than five years.

In addition to sending our survey results to Mr Darling, we also launched the UK’s only long-term fixed rate with no ERCs, in association with the Manchester Building Society.

We will be shortly writing again to the Chancellor to share our customers’ views on this market.

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