What are fixed-rate mortgages?

The interest payable on a fixed-rate mortgage is guaranteed not to change for a specified period, typically the first two to five years of the loan. However, a few lenders offer longer, 10, 15 and 25-year fixed-rate deals.

What are the advantages of longer-term, fixed-rate deals?

Borrowers will know exactly how much their monthly repayments will be over the long term which should help them to budget. Borrowers will also avoid the fees involved with re-mortgaging, which are routinely around £1,000.

What are the disadvantages of longer-term, fixed-rate deals?

The interest rates on long-term fixes tend to be higher than for short-term fixes and variable rate deals because of the way the deals are financed on the money markets, which are sensitive to movements in the base rate. It is easier for the money markets to predict the direction of the base rate over shorter time periods, which is reflected in lower mortgage rates.

Many borrowers are put off long-term fixes because they include early redemption charges, which make it expensive to change loans. Mortgage brokers argue that customers do not want to tie themselves in for too long because they are uncertain as to how their circumstances might change.

How many people have long-term, fixed-rate loans?

At the moment, less than 5 per cent of new mortgages are long-term fixed rate deals. Almost 80 per cent of new loans are either two or three-year fixes.

Why does the Government want to encourage more fixed-rate deals?

Alistair Darling, the new Chancellor, is concerned that the high costs involved in re-mortgaging every two to three years is putting off many potential first time buyers. He thinks that longer-term fixed rates could bring more stability to the housing market.

In an interview in the Guardian newspaper, he said: “When you look around the rest of Europe, it is more common to have longer-term fixed rates. We need to look at that. We need to reduce the volatility.”

What is the Government proposing to do to encourage more of us to take long-term, fixed-rate deals?

The Government is to consult on a new regime for covered bonds to help mortgage lenders finance more affordable long-term loans. Covered bonds are corporate bonds issued by credit institutions and secured against collateral, typically mortgages and public sector loans. The Chancellor will also report by the Budget in spring next year “on how to overcome any barriers preventing lenders from offering people long-term mortgages”.