From tomorrow Nationwide will become the first big mortgage lender to offer 25-year fixed-rate mortgages. Britain’s third-largest lender, with a 9.3 per cent share of the market, has set aside a £50 million tranche of cash to back its 25-year deal pegged at rates starting at 5.49 per cent.

Nationwide is the biggest mortgage lender to offer such a deal since the Government tried three years ago to encourage more lenders to offer European and American-style long-term home loans. Its move followed a Treasury-backed report into the long-term mortgage market.

Stuart Bernau, the executive director at Nationwide, said that the difficulty was in determining how to hedge such loans, but added: “The shape of the yield curve at the moment means that if this deal is ever going to be attractive, now is the time.”

In recent years millions of homeowners have switched to the safety of fixed-rate mortgage deals. More than 70 per cent of homeowners were locked into a fixed-rate deal this January, up from 39 per cent in January 2005, according to figures from the Council of Mortgage Lenders. Most savers opt for short fixes of five years or less.

A lack of demand for long-term mortgages forced GMAC, the financial arm of General Motors, to withdraw its 25-year home loan within three months of launching it in 2004. Some smaller lenders, such as Cheshire Building Society and Manchester Building Society, offer long-term loans. HBOS and Abbey, the two biggest mortgage lenders, have no plans to offer 25-year mortgages. Nationwide said that it was “testing the waters” with this and would offer other 25-year products if it proved successful.

Home buyers who choose the Nationwide deal can protect themselves against any future rate rises by fixing their interest rate at 5.49 per cent for 25 years. Those who do not have a 10 per cent deposit will have to pay a higher rate of 5.79 per cent. Borrowers who remortgage will also have to pay slightly higher rates.

The Nationwide deal has some flexibility, allowing customers to switch to a rival lender with no penalties after ten years. Those who switch before then will pay a penalty equal to 3 per cent of their home loan.

Some experts say that the deal may not be attractive enough to lure customers. Ray Boulger, of John Charcol, a mortgage broker, said that a rate rise had already been factored into swap rates, the markets that determine fixed-rate pricing, making the interest rates too high.

He said: “Is now the right time to fix for a long time? Probably not. Unless borrowers think that rates are going up past 5.5 per cent, then now is not the best time.”

James Cotton, of London & Country Mortgages, a mortgage broker, said: “Nationwide’s deal goes some way to addressing the issue for why many long-term deals don’t catch on. People don’t like to feel they are tied into one deal for too long, but ten years is still a fair length of time.”

The long game

25-Year mortgages

—Cheshire Building Society: rate 5.97% (until May 31, 2031)

—Kent Reliance Building Society: rate from 5.15% to 5.50% (expiry 25 years)

—Manchester Building Society: rate 5.39% (expiry 30 years)

—Newcastle Building Society: rate 5.45% (until March 31, 2027)

Source: Moneyfacts.co.uk

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