Call for cheaper mortgages

Plans are afoot to make radical changes to the way we buy our homes.

A group of banks is calling on the European Commission to back an attempt to bring in a new type of mortgage.

The loans would guarantee a fixed rate of interest for 25 or even 30 years.

But the banks need the Commission's help to raise the money and to allow borrowers to switch to a better deal if rates tumble.

The United States already operates a similar scheme.

Fannie Mae

It's run by the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

They can offer home loans at 0.20 - 0.25% of a point below market rates.

Borrowers get the best of both worlds - a guarantee that their mortgage payments won't rise, plus the option to switch to a better deal if one comes along.

Leading banks are behind the proposal to set up a scheme across Europe, called the European Mortgage Finance Agency (EMFA).

UK banks can't afford these types of loans because they are very difficult to fund on their balance sheets. Rob Thomas, European Mortgage Finance Agency

The UK's Northern Rock is involved, alongside Credit Agricole of France and Spain's BBVA.

The idea is that a group of banks could borrow money at a lower interest rate than they could on their own.

"It seems crucial to have a different sort of system for funding mortgages," says Rob Thomas of EMFA.

"UK banks can't afford these types of loans because they are very difficult to fund on their balance sheets.

"It's very difficult for a private sector bank to borrow on the capital markets at 20 - 30 years at any sort of economic rate because the capital markets aren't sure about the long term.

"But they are happy to lend to quasi-government bodies for long periods of time and that's why it's so crucial to have some form of government backing."

Volatility

In the UK, fixed rate deals are often for short periods.

It's thought this creates volatility in the housing market.

The offers in the US aren't necessarily at better rates than are available in the UK, but they do give homeoweners some stability.

There have been attempts to offer long-term fixed rates in the UK.

The latest is a rate of 5.48% from the Cheshire Building Society, although there is a six-year lock-in.

The society says it has had 300 applications so far, with a flurry after interest rates went up two weeks ago.

David Bitner: Expect to pay more for fixed rate

Experts predict that without a tie-in period, borrowers can expect to pay 7% for a fixed rate over a similar period. The average variable standard rate is 5.75%.

"On a £100,000 mortgage, to take a long-term fixed rate, you are looking at adding £300 - 400 a month to your costs," says David Bitner of Bradford & Bingley Marketplace.

"So most people are going to choose to go for the shorter term option and take that £300 - 400 and keep it in their pocket."

The Chancellor, Gordon Brown, has commissioned a review into long-term mortgages. It's due to be published shortly.

That could have a significant influence on EMFA's plans.

"We need to see what is the political appetite for this proposal," says Rob Thomas.

All figures quoted correct at 17 November 2003.