New chancellor, new mortgage plans: but will they work?

It's less than a month into Gordon Brown's new leadership and already changes are afoot in the UK housing market. The Bank of England base rate was increased earlier this month to 5.75% - its fifth rise since August 2006 - and the effect on UK mortgages looks set to be severe. In fact, recent statistics indicate that people with a mortgage of over £100,000 are likely to see their repayments increase by £192 annually over a period of 25 years.

But Alistair Darling, the new Chancellor of the Exchequer, has set about attempts to reshuffle the way the mortgage market in the UK is managed. Essentially, Mr Darling's new proposals will focus on creating a new bond regime, which will emphasise the importance of long-term loan deals for homeowners. By encouraging more people to fix their mortgage rates for long periods of up to 25 years, the scheme is designed to help first time buyers get a foothold on the property ladder.

The Chancellor claims that the intended shake-up has been brought about amid concerns that mortgage lenders are offering shorter-term fixed rate deals in order to charge high arrangement fees. Additionally, Mr Darling cited the high costs involved in re-mortgaging every two or three years as a prime factor in deterring potential first time buyers. Instead, he expects that long fixed-term rates will bring more stability to the UK housing market, and thus attract more and more people to the idea of buying a house earlier than might otherwise be the case.

In an interview with the Guardian newspaper, the Chancellor commented:

"When you look at the rest of Europe, it is more common to have longer term fixed rates. We need to look at that. We need to reduce the volatility."

However, many home loan experts state that the housing situation in Britain is unlikely to change unless long term deals become more affordable and more flexible. Fixed-rate mortgages that stretch over a period of 25 years have never been popular in Britain, with two to three year fixed rate mortgage deals being the prevailing choice made by many potential homeowners.

However, with the recent dramatic hikes in the Bank of England base rate, homeowners that are due to come off a fixed rate mortgage in 2007 or 2008 are likely to suffer more than a few teething problems when adjusting their payments to accommodate the current rate. As a result, long term fixed rate mortgages will likely provide more stability and enable borrowers to plan out their financial futures with greater certainty.

Despite criticism from some corners, Alistair Darling's new mortgage initiative has already seen some acceptance from key players in the mortgage market. The Council of Mortgage Lenders (CML) has welcomed the proposals but has specified that it needs to see more details of the mortgage proposals to better assess what their impact may be. Moreover, Nationwide Building Society has just announced that it will be re-launching its 25 year fixed rate mortgage in July. The deal was originally made available in March 2007, but the £50 million fund allocation for the scheme ran out only five weeks into its lifetime due to unprecedented popularity.

Adam Singleton is an online, freelance journalist and keen amateur photographer from Scotland. His interests include travelling and hiking.