Government to push long-term fixed-rate mortgages

LONDON, July 11 (Reuters) - The government unveiled plans today to promote long-term fixed-rate mortgages as thousands of homeowners are hit by rising interest rates.

Prime Minister Gordon Brown said the government would take steps to improve the way the mortgage market works and address a shortage in affordable housing.

The Treasury would consult on ways to help mortgage lenders finance more affordable 20- to 25-year fixed-rate home loans, Brown told Parliament.

Unlike those in the United States and continental Europe, British borrowers tend to avoid longer-term home loans.

Instead they have preferred cheap short-term fixed or discounted products, or variable rates which move up and down in line with the Bank of England base rate.

However, rising interest rates, coupled with record personal indebtedness, is causing a growing number of people to struggle to meet mortgage costs.

Fixed-rate loans protect borrowers from rises in interest rates and are ideal for those who prefer the security of guaranteed mortgage payments to help budgeting.

Generally, the longer the term of the fixed rate, the better value, as the costs of the loan -- arrangement, valuation and exit fees -- can be spread over a longer period.

Mike Lazenby, chief executive of Kent Reliance, which offers 25-year fixed-rate home loans, said long-term fixes ''allow house buyers to plan without the uncertainty and worry that rates and payments can rise dramatically two or three years down the line''.

He added that the market had a vested interest in selling shorter-term products: ''Unfortunately, some brokers prefer to resell new mortgages every two or three years.

''Even when the borrowers don't pay a fee, they pay indirectly as the lender will pay the broker and pass on the costs.'' However, concerns over a lack of portability and high exit penalties usually attached to long-term deals have made them unpopular among home-owners.

Rob Thomas, a senior policy adviser at the Council of Mortgage Lenders, said: ''The issue is just as much about the consumer appetite for long-term fixed rates as about how they are funded.

''It is too early to say whether these announcements will create a significant shift in the design of the mortgage products of the future.'' Nationwide Building Society, Britain's third biggest mortgage provider, launched a 25-year fixed-rate mortgage in March, which sold out in May.

Alan Oliver, head of external affairs, told Reuters: ''Our experience ... shows there is a market for it among some borrowers.

''Rising interest rates and mortgage fees going up means people may start to shift their attitude.'' MORE HOMES Brown also said the annual house-building target for England would be raised to 240,000 from 200,000 by 2016 and that he wanted to build three million new homes by 2020.

David Bexon, managing director of property portal SmartNewHomes.com, said the news was ''encouraging'' for first-time buyers.

But he added: ''We need to see immediate action. It will be years before this has any real impact on the market.'' He called for the government to scrap stamp duty for first home purchases, rapidly expand shared ownership schemes and give house-builders incentives to produce more low-cost housing.

REUTERS SBC VV2316