Clear Cut Mortgages highlights barriers to 25-year fixed rate market

Price differential: the best rates on a 25-year loan is 5.99%, compared to a 4.19% two-year fix currently available from Britannia BS. The table below shows the difference in monthly payments between the best 2, 5 and 25 year deals on the market today.*

Loan Amount Rate Monthly Repayment

2-year fix £100,000 4.19% £538.38

5-year fix £100,000 5.15% £593.36

25-year fix £100,000 5.99% £643.69

* Best buys for each term. Figures exclude fees and legal costs

Data correct at 8 December 2003. Source: Clear Cut Mortgages (www.clearcutmortgages.com)

Flexibility: there are only two 25-year products in the UK market – Leeds & Holbeck and Cheshire Building Societies. The early redemption penalties on the Leeds product is 9 months interest at the society’s SVR. Cheshire, meanwhile, has repayment windows in years 6, 8, 10, 12, 14, 16 and 18, with hefty redemption penalties otherwise. In order to take off, long-term fixes are going to have to have built-in to them increased flexibility for consumer demand to rise sufficiently.

Favouring short-termism: the UK market favours short-term mortgage offers. This tendency to offer short-term fixes means UK lenders continually sub short-term customers from their portfolio of borrowers on higher SVR or tracker rates. Stopping this culture of rate-tart-ism will be difficult given that it is engrained in UK borrowing culture.

Encouraging the shift: currently, just 35% of UK homeowners are on fixed-rate mortgage products – with the 5 years or less being the normal fixed period. However, 65% of homeowners are on SVR, tracker or discount mortgages. To achieve Brown’s aims, there will have to be a seismic shift of people moving to long-term deals.

Predictability: with consistently low rates, the market for long-term fixes is clearly an attractive one. However, looking at rates across the past 10 years or so, rate fixers have lost out with interest charges falling year-on-year. As rates seem likely to rise in the short to medium term, consumers will be deterred from such long-term commitments. The table below shows historical data for what homeowners would pay.

10-year product

Date taken Lender Loan amount Interest rate Monthly repayment Annual repayment

1993 Leeds & Holbeck £100,000 9.25% £856.38 £10,276.56

2-year products

Date taken Lender Loan amount Interest rate Monthly repayment Annual repayment

1993 Nationwide £100,000 5.50% £614.09 £7,369.08

1995 Yorkshire BS £100,000 4.95% £581.68 £6,980.16

1997 Bristol & West £100,000 4.95% £581.68 £6,980.16

1999 Skipton BS £100,000 5.45% £611.11 £7,333.32

2001 Britannia £100,000 4.24% £541.18 £6,494.16

* Best buys for each term. Figures exclude fees and legal costs

Data correct at 8 December 2003. Source: Clear Cut Mortgages (www.clearcutmortgages.com)