25-year Fixed Mortgages a New Option for Homeowners

Instead of 12-month fixed-rate mortgages and 24-month fixed-rate mortgages, homeowners in the U.K. will now be able to take out a mortgage with a fixed-rate for 25 years under plans that hope to restore stability within the U.K. housing market. This proposal by Chancellor Alistair Darling comes in response to the housing market crisis that has resulted from the worldwide credit crunch.

These loans, will allow borrowers to acquire something that the poorer and high-risk borrowers will not. They will be able to re-mortgage their homes at potentially cheaper rates, which will make payments more affordable for them for a longer period of time. Alistair Darling will encourage the mortgage lenders and the consumers to make the UK market a little less volatile by taking out these long-term loans.

What mortgage lenders will be able to do with these loans is offer long-term mortgages and a longer fixed-rate than previous loan types. Instead of the interest rate fluctuating throughout the life of the loan, which can affect the payment from month-to-month, the rate will remain fixed for as long as 25 years. This means that the homeowner's payment will not change during that 25-year period. These types of mortgages are rather rare in the U.K., but they are not at all uncommon in other economies around Europe.

Not many lenders offer fixed-term loans longer than a five-year period and these deals tend to have a higher price tag than short-term loans. The long-term mortgage plans of Alistair Darling are to give the lenders more freedom to raise the necessary funds by using covered bonds, which is a loan that is secured against a number of assets to protect the loan if there is a collapse experienced by the issuer. But the officials with the Treasury accept that any measure to use such financing will have its fair share of obstacles within the current banking environment.

Many banks have experienced large losses since last summer because they purchased bonds and other debt instruments that were secured on high-risk customers who had low incomes and very few assets. This makes these customers more likely to default on their payments. Now banks are very wary of investing in mortgage-backed securities. This is when a bank packages their debt and sells that package to investors. Because of this wariness, wholesale money markets are almost at a standstill. However, Darling made a speech last month that said his introduction of a 25 year fixed-mortgage would not only benefit the housing market, but would have a positive effect on the growth of the economy.

However, it is a concern of the ministers that the boom-and-bust phenomenon that is occurring within the U.K. housing market is going to risk the overall stability of the economy and make many households vulnerable to the fluctuations in interest rates, although these fluctuations are quite small. The Council of Mortgage Lenders is also concerned that this system will put a barrier in between the different types of mortgage customers.

As for the bankers, they are rather skeptical about the new plans because the Treasury would have no involvement in grading the loans, which would avoid any appearance that particular investments were being backed by the government.

Article by: Lee Dawkins 15-03-2008

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