The long haul

Fears of future interest rate increases and talk of plans to set up a European mortgage agency, which would allow lenders to offer very long-term fixed rate mortgages, have got some people wondering whether now is a good time to fix their mortgage repayments for the foreseeable future.

After a period of record breaking lows, the first interest rate increase in four years gave homeowners something to think about. Although the Bank of England's monetary policy committee (MPC) appears cautious about increasing the pressure on British borrowers, many City experts are expecting further rate rises in time.

For people who have borrowed to the limit of their means, the prospect of further increases is a serious concern. Who could afford to return to the rates of the mid-1980s, when rates reached a dizzying 15%?

One of the only ways to make sure your mortgage is not hit by any more interest rate increases is to tie yourself into a fixed rate mortgage. With a fixed rate mortgage, you can be sure of how much your mortgage payments will be each month for the duration of the fixed rate deal.

This sort of deal is not new. "When interest rates were at their 15% peak in 1986, a 25-year mortgage with a rate fixed at 11.59% proved popular," says Ray Boulger, senior technical manager at mortgage broker Charcol. Of course, the rate was well below the country's base rate at the time, which would explain its popularity. The deal would not look nearly as appealing these days. If you had chosen this mortgage 17 years ago and stuck with it, you would now be paying a massive 7.84% above today's base rate.

These days, long-term fixed rate deals offer far lower rates, but they are now above the current Bank of England rate. Leeds & Holbeck, for example, has a range of 10-, 15- and 25-year mortgages at 5.99%. The Cheshire building society offers a rate of 5.58% fixed until 2028 for buyers with a minimum 5% deposit or for people looking to remortgage who have a 10% deposit.

That is 1.83% over the base rate, but Boulger says: "The Cheshire's deal offers better value than a lot of shorter term loans." Scarborough building society, for example, charges 6.49% fixed for 10 years, while Halifax charges 5.75% over the same period. Newcastle building society's 10-year fixed rates stand at 5.99%. In fact, Boulger says: "In my opinion there isn't a good value 10-year, fixed rate loan out there at the moment."

In both Cheshire's and Leeds & Holbeck's 25-year fixed rate loans, there are get-out clauses. In the case of Cheshire, penalty free windows begin in the sixth year and then come up in the eight, tenth, twelfth years and so on. Borrowers have to let the building society know that they want to redeem their loan in the March of the window year. The whole process has to be over within three months, otherwise you miss the window and have to wait another two years. Leeds & Holbeck offers a similar escape route, and the first window arrives after a five-year tie-in.

If you need to redeem your mortgage outside of those windows, though, you could be stung by big penalties. With the Cheshire, for example, if you redeemed at any time up to the fourth year, you would have to pay 5% of the outstanding balance; so if you owe ?100,000 you would have to pay a fee of ?5,000 to redeem your mortgage. The fee reduces to 4% between years five and eight, 3% between years nine and 12, 2% in years 13 to 16 and 1% up until year 20. After that, redemption is penalty free.

With such restrictions in place, long-term mortgages such as these are clearly not suitable for everyone. "These mortgages offer very long-term security, but they can be expensive," says David Hollingworth of mortgage broker London & Country. "You'd have to be very well organised to be able to let the lender know, get another mortgage and sell your house within three months."

What is more, while the majority of long-term products are portable, so that you can take them with you when you move to a new property, you may still have trouble if your circumstances change. For example, if you become self-employed the lender may not offer a loan. If you want to upgrade to a bigger place and borrow more than the lender will allow, or if you want to buy a property that the lender does not consider to be suitable security for the loan, you may come unstuck. As Mr Hollingworth says: "How many people do you know who are sure they will stay put for the next 25 years?"

Mr Boulger agrees: "If you are borrowing money over a long period of time, your circumstances are going to change," he says. "People appreciate the flexibility that shorter term mortgages afford them."

It is not just the restrictions involved in a long-term commitment that might put people off. After all, there are many competitive deals still around, even now that rates look to be rising. The Portman building society, for example, currently has a mortgage with a rate fixed at 1.99% until December 2005, after which it becomes the Bank of England base rate plus 1.99%.

Choosing a mortgage deal depends on what you think will happen to interest rates and on your own priorities. If you are feeling jittery, believe those experts predicting sharp increases over the next year and are keen to know just how much your monthly repayments will be, then perhaps a long-term, fixed rate mortgage will set your mind at ease.

If, on the other hand, you want to be free to take advantage of the cheapest deals the mortgage market has to offer, don't go running for cover just yet.