UK learns to love security

Ultra-cheap mortgage rates or long-term security? This could be the choice you face in the next couple of years if Gordon Brown's plans to develop the long-term fixed-rate mortgage market succeed.

Mortgage brokers and property experts were sceptical as to whether borrowers would be prepared to give up cheap, short-term fixed and discounted rates in favour of more expensive, long-term fixed rates. But some now believe that lenders could be encouraged by the greater security presented by long-term fixed rates to offer borrowers bigger loans. This would prove immensely popular with people who are struggling to buy their first home or trade up, not because they don't earn enough to pay the mortgage but because their mortgage company won't lend more than three and a half times their income.

A survey from KPMG suggests that consumer opinion is changing. It found that 60 per cent of mortgage holders would be likely to take out a long-term fixed-rate loan, and more than 40 per cent of them would even be willing to pay a set-up fee of up to two per cent in return for a competitive interest rate.

Flexibility seems to be the key. In the UK, long-term fixed-rate loans have traditionally had long redemption penalty periods, forcing you to choose between staying in the same home for the entire duration of the fix, taking the mortgage with you to the next property (and there is no guarantee the lender will agree to lend on the next home of your choice or that your employment status will still meet the lender's criteria), or pay a hefty charge.

But in the US - the market which Brown is keen to see emulated - borrowers are not tied to their loans with punitive early-redemption charges.

'Long-term loans are penalty-free in the US so customers can refinance whenever they want,' says Ray Boulger of Charcol. 'Two years ago, the US base rate was 6.75 per cent; it's now under 5 per cent. And as rates have fallen, a market for shorter-term fixed rates has begun to develop, as borrowers choose two five-year fixes for, say, 2.5 per cent, rather than a 30-year deal for 5 per cent. So while Mr Brown is singing the praises of the mortgage system in the US, there is a trend there towards the UK model.

'The real lesson is that there are pros and cons to every market type and you can't expect to transfer all the best bits from one system to the best bits of another without either losing something valuable or incurring a new cost.'

Louise settles for a sense of certainty

Payment certainty was at the heart of Louise
Corbett's decision to take out a long-term fixed
rate. 'We wanted to know for sure what our
outgoings would be. My daughter is still in
college and I'm supporting her so I wanted to
have that security of repayment at least until she
finishes her education.'

Louise and her partner took out a 10-year 4.25 per
cent fixed rate mortgage with Abbey National to
buy their maisonette in Stanwell Moor, West
London, earlier this year.

'Our mortgage term is only 15 years and we were
keen to keep costs as fixed as possible during that
period. I feel really secure about knowing what
my mortgage payment will be for the next 10
years, no matter what happens to interest rates in
general,' Louise says. 'It just makes life easier if
you know exactly how much you have to pay out
each month.'

She says a friend lost a lot of money when rates
went out of control and the housing market
crashed in the late Eighties.

Who's doing the best deals

Two years

Charcol: discounted at 0.32 per cent below base
rate to give a current rate of 3.43 per cent.
Completion fee ?295, redemption penalties during
discounted period.

Charcol: fixed at 3.39 per cent, for loans over
?150,000. Completion fee ?395 and booking fee
?49. Redemption penalties during fixed period,
but you can repay 25 per cent of the capital each
year penalty-free.

Britannia: fixed at 3.34 per cent, completion fee
?299, redemption penalties during fixed period.

Three years

Cheshire Building Society: discounted by 2.16
per cent to 3.49 per cent. You can repay up to
?5,000 a year penalty-free, free valuation up to
?750,000, but ?275 application fee.

Derbyshire Building Society: discounted by 2 per
cent to 3.69 per cent. Completion fee ?220,
booking fee ?75. Redemption penalties during
discounted period, but borrowers can repay up to
10 per cent of capital each year without penalty.

Bank of Ireland: fixed at 3.65 per cent.
Completion fee ?299. Redemption penalties
during fixed period.

Five years

Lambeth Building Society: bank base rate for
five years, so 3.75 per cent. Collar to stop rate
falling below 3 per cent. No redemption penalties,
even during discount period. Completion fee
?390.

Woolwich: fixed at 3.99 per cent. Completion fee
?295. Redemption penalties apply but you can
repay up to 10 per cent each year penalty-free.

Ten years +

Woolwich: fixed for 10 years at 4.69 per cent.
Completion fee ?295, redemption penalties
throughout, but you can pay back up to 5 per cent
a year penalty-free.

Manchester Building Society: fixed for 25 years
at 5.09 per cent. Redemption penalties for 10
years, but 10 per cent repayments allowed.
Completion fee ?395.

Cheshire Building Society: fixed for 25 years at
5.14 per cent. Redemption penalties apply
throughout the term, but there is a three-month
window in year six and alternating years after
that to redeem the loan penalty-free. You can also
repay up to ?5,000 of capital each year
penalty-free. Completion fee ?275.

Source: Charcol (Tel: 0800 718191)