Chancellor to bring in 25-year fixed mortgages

The introduction of 25-year fixed rate mortgages is among Budget proposals to restore stability to the UK housing market.

Low-risk borrowers will also get special access to loans at a much cheaper rate than less reliable customers.

Mortgage lenders will be able to use new rules to offer longer term fixed rate mortgages. Interest rates will be fixed for as long as 25 years.

While long-term mortgages like this are common in many European countries, they are relatively rare in the UK, where only a few lenders offer fixed-rate loans for longer than five years. These are often more expensive than short-term mortgages.

The Chancellor Alistair Darling’s mortgage proposals are based on giving lenders the freedom to raise money using covered bonds. This is a loan secured against a pool of assets that covers the loan if the issuer collapses.

It is hoped the introduction of long-term fixed rate mortgages will eliminate the “boom-and-bust” nature of British house prices, which risks wider economic stability and makes many households vulnerable to interest rate changes.

However, Treasury officials accept that any plan for lenders to make use of covered bonds to fund long-term mortgages will face obstacles from the banking industry.

Since last summer, many banks have suffered losses as they bought bonds secured on sub-prime mortgage customers.

This has made some banks wary of investing in mortgage-backed securities, where banks package debts and sell them on to investors.

The Chancellor said that the introduction of long-term fixed rate mortgages would help “not just the housing market but wider economic growth in these uncertain times.”

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