When your mortgage becomes a life sentence

The Chancellor wants Brits to look to the US and buy property with a long-term fixed loan. But Patrick Collinson disagrees

The Chancellor this week said he wants us to become like America and switch to long-term fixed rate mortgages. But when Jobs & Money took a look at mortgages in the US, we found them over-costly, over-complex and we won't want them over here.

US households tend to take fixed loans which run over 30 years, rather than the 25-year term that is common in the UK. This alone should mean monthly costs should be lower. But the typical interest rate - currently at 6% - is higher than fixes commonly available in Britain, making monthly costs higher.

Gordon Brown likes the idea of long-term fixes because they would reduce the interest-rate sensitivity of the British economy.

Britain is almost alone in its attachment to short-term mortgage products such as two-year fixes or discounts.

This means that an interest rate change translates rapidly into rises or falls in consumer spending, unlike in the Euro area or the US, allowing central banks there to ignore the housing market and focus on industry and manufacturing when setting interest rates.

David Miles, finance professor at Imperial College will conduct a study for the Chancellor "to examine the case for, and how, Britain can develop a market for long-term fixed mortgages."

Professor Miles will focus on whether there is "market failure" in the lack of long-term fixes and whether the government will have to step in to put the market right.

But Ray Boulger of brokers Charcol, says that Britain already has the most advanced and sophisticated mortgage market in the world and that there is little or no demand for 25-year fixes. "We have sold very few long-term fixes. If rates were more decent, we might sell more, but it will always be a small market compared to short-term fixes."

Halifax, Britain's biggest lender, said it has seen little demand for long-term fixes, with its most recent 10-year fixed-rate mortgage finding only 300 takers.

"We are very happy to participate in any review of the mortgage market. There may well be a demand at some time in the future for a long-term mortgage, but there isn't at the moment," said a spokesman.

Long-term fixes have not taken off in Britain because they typically cost more - around 5.5-6% a year versus 3.5-4% for a two-year fix - and borrowers face hefty penalties if they want to walk away from them early.

Cheshire Building Society is the only lender currently offering a 25-year fix, pegged at 5.89%, and apart from "windows" when borrowers can escape penalty free, even after 16 years "early redemption" costs the home buyer 4% of the total loan.

Simon Jones of Savills Private Finance says that given the choice between a "best buy" two-year fix, such as the 3.54% deal currently on offer from Britannia Building Society or a 25-year 5.89% rate, "99% of borrowers will go for the cheaper rate".

There are plenty of 10-year fixes available in Britain, such as the 4.79% from Britannia or 4.95% from Leeds & Holbeck, but not much evidence of mass take-up.

Neither can the Chancellor rely on the US evidence to support his desire for a less interest-rate sensitive economy. House prices have boomed in the States over the past year as families have refinanced their old 30-year fixes into new, lower-rate 30-year fixes. And the irony is, while the Chancellor wants to shift us to long-term fixes, the US is heading the other way. Only around a third of new mortgages in are now on 30-year rates.

Instead Americans are opting for British-style "adjustable rate mortgages".

What the experts say:

· "If you compare our mortgages with those in the US, you are comparing apples and pears. The US 25-year mortgage has no redemption penalties - the Britannia 10-year fix is at a good 4.79% but has a 360-day interest redemption at all times during that period.
"The plans are sold as portable so you don't lose out if you move. But what happens if you divorce, trade down or leave the country?
"I think some of the lenders are lobbying for this - it would cut down on switching and remortgaging and enable them to build up profits."
Phillip Cartwright, London & Country

· "The way I look at it is, is that if I had recommended a 25-year fixed mortgage 10 years ago the client would be tied into a rate of 15% now when the base rate is 3.75%. Long term fixed rates are also heavily penalised and this is a problem.
"I support the Chancellor's aim of stability and looking to see what is available across the water, but the trend at the moment is towards offsetting. If anything, people are changing mortgages more often and trying to pay mortgages off early. There is no longer the belief that a mortgage is for life."
Andy Frankish, Mortgagetalk