Leeds offers 25-year loan

Gordon Brown's Budget push for longer term fixed rate mortgages has spawned its first response with a new 25-year product due to be launched next week.

Leeds and Holbeck building society will be offering a fixed rate deal of 5.39% for 25, 20 or 15 years from Monday. The mortgage will include an option to repay 5% of the capital each year without penalty.

To counter fears about a 25-year lock-in, the society will allow customers to redeem the mortgage or transfer to another lender after five years and every two years thereafter. However, movement is limited to a three month "window" specified by the lender.

There are no conditional insurance requirements on the product and larger income multiples may be available to some borrowers.

Longer term fixed mortgages, including fixes as long as 30 years, are common in the US and on continental Europe, but they tend to work out more expensive. Critics have pointed out that had 25-year fixes been taken up 10 years ago, some borrowers would have found themselves locked in to rates of 15% . The base rate is now below 4%.

Simon Jones, of mortgage broker Savills, says: "I just don't think there is the demand for 25-year fixed products - not unless they follow the no-penalty model of the US. When there are still good five-year fixed deals at about 4.25-4.5%, the borrower probably wouldn't want to commit to 5.39% over 25."

The Chancellor believes that long term tie-ins would offer greater economic stability by reducing sensitivity to interest rate fluctuations. However most lenders are sceptical. Even 10-year fixes are unpopular, they point out, while low interest rates have produced some very competitive short term fixed rates in recent years, prompting borrowers to shop around for better deals and to remortgage.