Why homebuyers' interest could become more fixed

With interest rates rising, many homebuyers will be seriously considering getting themselves into a fix.

Many people, particularly those on tight budgets, are attracted to fixed rate mortgages because of the payment certainty they provide, and these deals are looking more tempting following this month's Bank of England base rate hike - quite possibly the first of several this year.

Most people taking out fixed rate home loans opt for deals lasting two, three or five years, but this week saw the launch of a new mortgage allowing borrowers to fix their monthly mortgage payments for 25 years.

This deal could prove appealing to those determined to get on to the housing ladder because it lets people borrow up to five times their income - far higher than the traditional income multiple. It also allows them to hedge their bets by keeping some of the mortgage on a variable rate.

The lender behind this new deal is GMAC - a company some people will have never heard of but which is actually the 13th largest lender in the UK and a subsidiary of the American corporation General Motors.

Economists' predictions of perhaps two or even three more quarter-point interest rate rises this year will have left many homebuyers feeling nervous, so now's a good time for GMAC to launch a fixed-rate deal.

But will they want to be tied into something lasting 25 years? In the past, borrowers have shown very little enthusiasm for long-term fixed rate deals. And a lot of people will think the GMAC deal's rate of 5.95% is high bearing in mind you can currently get a two-year deal from Yorkshire building society where the rate is fixed at just 4.44% with no redemption penalties after the two years are up. The Portman and Chelsea building societies are offering two-year fixes at 4.49% and 4.54% respectively.

However, several mortgage experts this week broadly gave the thumbs-up to the new deal (previewed in Jobs & Money's Best Buy pages last week) Here we examine the pros and cons of the new GMAC mortgage and compare it with the other long-term fixed deals on the market.

The company's move comes just two months after the publication of a major study commissioned by Gordon Brown, the chancellor, into why Brits don't seem very keen on long-term fixed rate home loans.

He would like the way we pay for the roof over our heads to become more certain and predictable because he believes this would take a lot of the volatility out of the housing market. Getting people to take out mortgages where monthly payments are fixed for 10, 20 or even 25 years would help achieve this.

But unlike our counterparts in other European countries and the US, we Brits tend to prefer short-term fixed and discounted rate deals which we can walk away from fairly easily.

The only other 25-year fixed rate mortgages on the market - offered by Leeds & Holbeck and Cheshire building societies - haven't taken the market by storm.

GMAC's deal, only available through mortgage brokers and independent financial advisers, allows you to fix all or part of the loan over 25 years. If you fix all of your mortgage, the rate is 5.95%, which it claims is "historically low". There are three other options allowing bor rowers to customise the mortgage by having part of it as a base rate tracker where you pay base rate plus 0.75% (4.75% at the moment). If you are worried interest rates might fall, you can put 25%, 50% or 75% of your home loan on to a base rate tracker, enabling you to benefit from any future rate cuts.

There are early redemption penalties tying you into the loan but they only last for the first seven years and only apply to the fixed part of the mortgage.

Because a long-term fixed rate means stable monthly payments and no nasty shocks, GMAC is able to offer higher than average income multiples. Someone opting to fix their whole mortgage for 25 years and putting down a 25%-plus deposit will be allowed to borrow up to five times their income (4.25 times joint income). The more you borrow on a variable basis, the lower the income multiple.

The deal requires a minimum income of £30,000 (£40,000 joint) so will exclude some first-time buyers, the minimum deposit is 10% and there is a £395 arrangement fee to pay.

So what do the experts think? Simon Tyler, at mortgage broker Chase de Vere Mortgage Management, says: "If you like the idea of long-term fixed rates, GMAC is the pick of the current crop. It is a very flexible deal and if long-term fixes are going to take off in this country, as they have in America, they will follow this type of model."

Depending on how much of your loan is fixed and how much is on the tracker, the rate you pay will vary, says Mr Tyler. For example, if you have 25% of your loan on the tracker and 75% at the 5.95% fixed-rate, that gives an initial pay rate of 5.65%. For 50% on the tracker, the current pay rate would be 5.35%.

· Cheshire building society is currently offering a 25-year fix where the rate is 5.88% for loans of up to 95% of the property's value (5.78% for those who can stump up a 20%-plus deposit).

Leeds & Holbeck's 25-year fixed rate deal is similar though the rate is slightly higher at 5.99%. The maximum loan is 90% of the property's value.