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Last Updated: Tuesday, 10 July 2007, 11:52 GMT 12:52 UK
Push for more long-term mortgages
'For sale' boards
A US-style credit crunch could derail the British economy
The government is planning to introduce measures to encourage banks to offer more longer-term fixed rate mortgages.

New Chancellor Alistair Darling told the Guardian newspaper the proposals would be a key to solving the current housing crisis.

His comments come three years after his predecessor, Gordon Brown, launched a review into the UK's mortgage habits.

The review said the trend for cheap short-term deals was one reason for the boom-bust cycle in the property market.

This is particularly prevalent at the moment, with the Bank of England raising interest rates to 5.75% this month - its fifth rise since last August.

Consumer groups have voiced strong concern that the latest rise will push many homeowners close to their financial limits, causing them to struggle to pay their bills, while for others, buying a home is no longer a possibility.

Still unpopular

Longer-term mortgages could insulate homeowners to the fluctuations in interest rates, by fixing their repayments for up to 25 years.

Yet they account for just 5% of British home loans, much lower than in the US and continental Europe.

Professor David Miles, of Imperial College London, was commissioned in 2004 by the former chancellor to examine why long-term mortgages were so unpopular in the UK.

He found that the availability of discounted variable-rate deals crowded out comparatively expensive longer-term fixed-rate loans.

The report found that borrowers tended to focus on the low initial cost of the debt, failing to consider how those payments might change relative to their incomes.

The Council of Mortgage Lenders said this issue was now high on the government agenda, amid increasing affordability constraints.

Fixed-rate mortgages are due to expire for about two million people over the next 18 months, reverting to high variable rates.

The group believed the government could be looking at a way to encourage lenders to take on the financial risks needed to fund long-term mortgages.


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