UK: Lender creates groundbreaking fixed rate mortgage

The Co-operative Bank has often come up with novel ideas but this one is not a new idea at all - it's taking one of the most important features of Islamic financing and applying it to the general market.

Islamic financing works by the lender purchasing the asset, adding a profit margin and reselling it to the ultimate purchaser - the profit margin is fixed, and therefore the repayments are stable throughout the term of the agreement.

Other financing arrangements have individual elements of this - for example, in hire purchase the company financing the purchase buys the asset and rents it to the ultimate purchaser with a single, nominal payment at the end of the term. That is usually called the "option fee" and in legal terms, it is where the ultimate purchaser takes up the option to purchase the asset from the finance company.

But such schemes have never before been used for home loans, says the Co-Op.

It's not strictly true because of the Islamic financing concept.

However, in order to qualify for Islamic financing, the premises and their use has to be "halal" - that is in compliance with Shariah law. The Co-Op scheme does not present such restrictions. However, in relation to home loans, Shariah law has little application. In commercial premises schemes, however, the application would be more problematic as premises must not be used for e.g. the sale of alcohol or non-halal foods. The reason for this is one of ethics: the investors in the Islamic banking scheme are not permitted to benefit from non-halal investments.

But there is one major feature of the Co-Op loan which is very innovative: the loan is fully portable if the borrower moves home.

The Co-Op summarises its scheme as follows:

- A fixed rate of 5.99%

- GBP499 application fee

- No early repayment charges after the first ten years

- No higher lending charges

- Free standard legal and basic valuation fees for re-mortgages

- Customers can make overpayments of up to 5% during the first 10 years

- Maximum 95% Loan To Value

The fixed interest rate of 5.99 is applicable until 31.10.2032. Applications after 1 November this year will be at a rate assessed at the date of application.

The Co-Op is making the loan available to direct applicants only, not through brokers.

However, long-term fixed rate loans are available from other lenders, too. For example, The Halifax has a 25 year fixed rate loan - but at a rate of 6.35%. That, too, is portable and allows for both payment holidays and for advancing repayments.