Take a long-term view

According to the Treasury, short-term thinking is one of the housing market's biggest problems. So much so that Gordon Brown has commissioned research to find out why so few buyers opt for long-term, fixed-rate mortgages. In other European countries, loans with interest fixed for 10 or 15 years are commonplace. However, their interest rates, and house prices, have been less volatile than in the UK. And borrowers usually pay back their mortgages over fewer years.

According to the Treasury, short-term thinking is one of the housing market's biggest problems. So much so that Gordon Brown has commissioned research to find out why so few buyers opt for long-term, fixed-rate mortgages. In other European countries, loans with interest fixed for 10 or 15 years are commonplace. However, their interest rates, and house prices, have been less volatile than in the UK. And borrowers usually pay back their mortgages over fewer years.

The picture in the UK is very different, with home owners paying either a variable rate mortgage or moving between relatively short, fixed-rate or capped deals. Here, the number of buyers taking out fixed-rate loans has declined for several months, accounting for just 26 per cent of new mortgage business in January, according to the Council of Mortgage Lenders (CML).

The problem, brokers say, is that long-term fixed-rate mortgages are simply not attractive now, despite the City view that interest rates will rise further. Figures from the CML show that take-up of fixed-rate mortgages peaked in August last year, at 47 per cent of loans. At that time, fixed-rate mortgages were cheaper than variable rates by 0.35 per cent on average.

By January this year the situation had reversed, with the average new fixed-rate mortgage at 4.68 per cent, against 4.41 per cent for variable rate loans (this is including both long- and short-term fixed-rate deals).

Longer fixed-rate mortgages are currently more expensive still: Moneyfacts, the financial research service, puts the best current five-year fixes at 4.99 per cent. "The headline rates are not as good as they were," says Jane Harrison, a director at London & Country Mortgages. Nor is the headline rate the only cost of a longer-term fixed-rate loan - they almost always go hand in hand with fees and penalties, which usually means at least a booking fee and a penalty for paying back the loan during the fixed-rate period.

One of the best five-year fixed rates, says Harrison, is a 5.03 per cent loan, fixed for five years with Derbyshire Building Society. But the mortgage has a £295 arrangement fee. There is a sliding scale of penalties for paying back the loan early, starting at 4 per cent until 2006 and falling to 2 per cent of the repayment in the last two years of the fixed rate.

On longer-term loans, the penalties become more serious still. A 10-year fixed-rate mortgage with Britannia has an interest rate of 5.14 per cent ,which might seem reasonable but the redemption penalty, at 360 days' interest, is substantial.

Fixing the interest rate for the lifetime of the mortgage is more expensive still. Cheshire Building Society can arrange a mortgage fixed for as long as 25 years, with a rate of 5.65 per cent or 5.75 per cent, depending on the borrower's deposit. But redemption penalties start at 5 per cent of the loan, and even if you pay back the loan after 24 years you attract a 1 per cent penalty.

The Cheshire offers a "redemption window" at fixed periods during the loan - the first is after six years - but borrowers taking on this sort of home loan would need to be very sure that it suits their needs not only now, but a long way hence. The difficulty is that very few home owners can predict so far into the future. The Treasury's Miles Report into the mortgage market acknowledges this, accepting that longer-term fixed-rate mortgages do have pitfalls. A home buyer who thinks there is even a small chance they might have to move within the fixed-rate period will probably be better looking elsewhere, because the cost of paying off the loan can be prohibitive.

Even if a buyer is moving up the property ladder, and the lender describes the mortgage as "portable", they should be wary. Even though lenders say that loans can be moved to another property, this is not always possible. Even where it is, the borrower must keep to the term of the original mortgage. This can make monthly repayments for a larger loan unaffordable - and they may well be paying more interest than on an alternative loan.

Where very long-term fixed rates do have a niche is for buyers who are borrowing heavily and so want to know that there is no chance that their repayments will rise. This might be the case for a couple moving up to a house they are confident will be a long-term family home. "They will be right for those who are stretching themselves and want certainty," says London & Country's Jane Harrison. But a long-term fixed rate is some way from becoming the norm.

Stephen Pritchard writes the Wealth Check feature in the Save & Spend section of 'The Independent' each Saturday.