New mortgage hits market

Standard Life mortgage deal offers long-term stability

By BBC personal finance reporter Andrew Verity

The banking arm of life insurer Standard Life has confirmed it is launching an unprecedented mortgage deal in the UK on 16 June.

It guarantees borrowers they will pay no more than 6.25% for the entire 25-year term of the mortgage.

UK property market has been buoyant

Mortgage brokers are already predicting that the deal will attract hundreds of millions of pounds in new business - perhaps more than the life insurer has bargained for.

The new mortgage is unprecedented because it offers a "capped rate" of 6.25% for the whole mortgage term.

That means the borrower will never pay more than 6.25% while, if the rates offered by three biggest lenders fall below this figure, the Standard Life Bank rate will also fall.

The big-three lenders are Halifax, Abbey National and Cheltenham & Gloucester.

Over the past 25 years, the average variable mortgage interest rate has been 10.8% - meaning borrowers would be quids in by more than 4% if that pattern were repeated.

However, it is expected that interest rates will in future by much lower than they have been.

Capped

Until now, lenders have rarely offered to cap interest rates for any longer than five years.

Some banks have offered to fix rates over 25 years. Bear Sterns, the US bank, offered such a deal in the early 1990s, but the rate was 11.95%.

Neil Ross, managing director of Standard Life Bank, said: "Many of us will remember when interest rates hit 15% and the real hardship it caused. 25-year certainty in the UK mortgage market has been unheard of until today."

Analysts say the deal will prove difficult for other lenders to copy. Standard Life is able to offer such low rates because it has more than £80bn in assets, £11.5bn of which are not tied up in promises to its customers.

Broker

Independent mortgage broker John Charcol is expected to recommend the mortgage to a large proportion of customers. The broker arranges up to £100m in loans every month.

Charcol mortgage expert Ray Boulger says the deal would be almost impossible for mortgage lenders to arrange using normal methods.

"Only other large insurance companies have even a remote possibility of offering a product such as this," he said.

Privately, analysts say Standard Life is desperate to retain the initiative in the mortgage market.

Last year, it offered a flexible mortgage product that was so popular it began to affect the group's balance sheet. Senior executives decided to stop promoting it.

Big changes

Jim Spowart, the Scottish banker who created Standard Life Bank, has transformed the business from a standing start into a mortgage company taking more than 15% of the market and lending £4bn in mortgages, exceeding all expectations.

After Standard Life applied the brakes to its mortgage lending, Mr Spowart left the company and joined the Halifax to set up Intelligent Finance, an internet and telephone bank in direct competition to Standard Life.

Intelligent Finance is due to launch later this month. Standard Life is also under pressure from carpetbaggers who want it to drop its mutual status and float on the stock market.

Two and a half million members must cast their votes on the issue by 27 June.

Australian-born carpetbagger Fred Woollard claims the typical member could expect windfall shares worth about £6,000 each, although Standard Life disputes this figure.

A report by John Russell, an analyst at international banking group HSBC and Standard Life policyholder, said the figures put forward by campaigners pressing for conversion were "highly misleading".

His report said: "The majority of members will receive far less than the average windfall values being quoted.

"For a significant number of policyholders, the shares will not be free. They will be paid for through lower returns that are an inevitable consequence of the proposed change of status."