The Fixed-Rate Mortgage Gamble
Plans are afoot to make long-term fixed-rate mortgages more affordable. Will it be enough to rid us of our mortgage gambling habits?
Would you want a fixed-rate mortgage that lasts for a quarter of a century?Currently, the answer for most people seems to be a resounding no. A recent look at the type of mortgages people are applying for via this site demonstrated that two and five-year fixes are far and away the most popular choices.Enter Gordon Brown...However, if the new resident of 10 Downing Street has his way, increasing numbers of us could be opting for long-term fixes. On the face of it, his plan looks like a sensible one. Rather than trying to force people to take out deals they don't want, he wants to make long-term fixed-rate mortgages more attractive by giving lenders more flexibility in how they finance them.The idea prompting this move is that more long-term fixed-rate mortgages will contribute towards a more stable and affordable housing market. I can't say I'm convinced that will be the case, and I'm not alone in that regard, yet I'm still pleased to see this sort of proposal being pursued. Anything that increases choice and encourages competition in the mortgage market should benefit us all.Comparing long and short fixesThe main theory as to why we're opting for short-term fixes is that they are a lot cheaper. It's also reckoned that us Brits just like gambling with this aspect of our finances, not wanting to miss out if rates are lower in a few years time. Our European and American cousins are both much conservative though with many opting for long-term fixed rates and surviving to tell the tale.Anyway, I used the Motley Fool mortgage search engine to see what the current difference is between the most competitive fixed-rate mortgages over two and twenty five years.To keep things simple, I just looked at mortgages that didn't have any nasty redemption penalties that extended beyond the length of the fixed-rate deal. I also ignored ones that have horrendous upfront fees (basically anything that made me swear out loud when I checked the small print).Having extracted the dross, I found that the cheapest two-year deals came in at around 5%. For twenty five years, they started at around 6%. To put this into perspective, the long-term fix costs an extra £60 a month for each £100,000 of mortgage. With this sort of difference, it's easy to see why we're plumping for short-term fixes. And that's ignoring the fact that long-term rates are harder to find than trustworthy politicians. Only a handful of long-term deals are currently on offer although Nationwide has just announced the return of its 25-year product (the rate is a wee bit off the pace however at 6.39%).Will the plans work?At the moment, it's unclear how much the differential between long and short term fixes would narrow under the new proposals. It's also unclear how much it would need to narrow to make people start opting for long-term fixes in any significant numbers. I suspect the difference would have to be 0.5% or less.Our mortgage gambling habit will still be tough to shake. We've got used to low interest rates over the last decade and overly complacent about how volatile they can be over long periods. Indeed, twenty five years ago the base rate was over 12%, more than double its current rate of 5.75%. Food for thought.Looking for a fixed-rate mortgage?Whether you're after a fixed rate for two years or twenty five, The Fool's mortgage service could help you find the best deal for you.More: Mortgage Misery | How To Pick A Mortgage