You could be forgiven for feeling a sense of déjà vu on hearing that Grant Shapps, the Housing Minister, is calling on lenders to provide more long term fixed rate mortgages of up to 30 years. This was originally put forward by the Miles Review during Gordon Brown’s tenure as Chancellor, in a bid to bring more stability to the housing market by removing volatility in mortgage payments.
A number of lenders supported that bid to break new ground in the long term fixed rate market but with limited success. I think that the reasons for this were two-fold:
Firstly, as is so often the case, it boils down to the mortgage rate and therefore the monthly cost for the borrower. Longer term fixed rates generally come with higher interest rates than their shorter term cousins. That poses a dilemma for the borrower as to whether to remove uncertainty about rate movements in the long term or to take the saving in rate and work on the ‘jam today’ principle.
Secondly and perhaps even more importantly is the fact that most fixed rate deals will require the borrower to lock in. Most mortgages will be portable to a new property but there’s no guarantee that the lender will offer any additional borrowing – maybe because of tighter criteria or a change in the borrower’s circumstances. This could end up costing the borrower a substantial early repayment charge (ERC) if they have to take a new mortgage elsewhere.
Lenders did try to address this issue in the past, but improving the terms of any ERC will have an inevitable impact on the rates they can offer and in turn reduce the borrower appeal. The benefits of long-term fixed rate mortgages are that borrowers are insulated against the rate rises that will inevitably come and locking in at the bottom of the rate cycle could make a lot of sense.
Although this latest call for long term deals comes during a very different economic climate, the challenges are likely to remain very much the same and my expectation is for borrowers to greet this with a distinctly lukewarm response.