Some homeowners are grappling with rising mortgage rates, and now Housing Secretary Michael Gove has called on lenders to offer long-term housing loans as an antidote.
Most mortgages in the UK are for two or five years, which means that homeowners often re-mortgage.
This makes it easier to access a bargain when mortgage rates are low, but also means you’re exposed to higher mortgage costs when interest rates rise.
But in countries such as the US, France and Denmark, fixed-rate mortgages normally have terms between 20 and 40 years.
Out of reach: Long-term mortgages are usually not offered by major UK lenders
Gove said these longer-term mortgages would help mitigate sudden interest rate hikes currently affecting British homeowners.
Speaking to the Telegraph, Gove said: “One of the things that I think is good about getting to a higher level overall is making sure we can develop the kinds of products that are elsewhere in the world.. mortgages, so you don’t get the swing of how much you pay every two or five years, but you do have 25 years of certainty about what you pay. I think that’s something we need to look at.’
So why are UK homeowners and lenders apparently so addicted to shorter mortgage terms – and can longer term home loans ever take off here?
Why does the UK have short term mortgages?
This depends on who you ask.
Mortgage lenders would say consumers don’t want long-term deals, while many consumers say they do – just for the right price.
Traditionally, British property owners love a bargain. Many like to be able to check out the market every two or five years and nail down the best mortgage rates available at the time.
The same goes for things like insurance and utility bills, where Brits regularly look for the best deal – or at least they did before energy prices started to rise in October 2021 and cheap deals disappeared.
Short-term mortgages have another great benefit: they make it easier to move and easier to fit into important life decisions.
This means that there has never really been a massive demand for long-term mortgages in the UK.
But many consumers say they would like to have the option of longer mortgages, but these have been too expensive and with too many obligations when UK lenders have offered them.
Step up: The longer a mortgage is, the higher the interest rate tends to be – although this isn’t always the case, as currently two-year contracts in the UK cost more than five-year deals
Has the UK ever had longer term mortgages?
The last major wave of longer-term mortgages came in 2007, when former Prime Minister Gordon Brown called on lenders to offer these home loans.
In response, lenders including Nationwide, Halifax, Kent Reliance and Manchester Building Society all launched 25-year deals.
However, the safety of these deals came at a price, as most were at least 1 percent more expensive than consumers would pay for shorter deals.
This was because lenders believed there was a high level of risk associated with loans for that period.
This combination of high rates, high prepayment fees, and an associated lack of consumer interest caused these long-term home loans to all dry up and be quietly pulled from sale.
Now, most mainstream mortgage lenders will offer up to 10-year fixed rate loans.
But some smaller lenders have turned heads with longer-term deals.
For example, Habito and Kensington Mortgages have fixed-rate mortgages up to 40 years, while newcomer Perenna plans to launch fixes of at least 20 years later in 2023.
But in part, the lack of long-term mortgages all comes down to cultural differences between countries like the US and UK.
Martin Stewart, founder of mortgage broker London Money, said: ‘The answer to me is that it’s about culture, and that takes a long time to change. That’s not to say that this can’t change, if the opportunity presents itself.’
Can long-term mortgages come back to the UK?
Possible. The current rise in mortgage rates could mean homeowners are finally embracing long-term solutions.
Nick Mendes, mortgage technical manager at broker John Charcol, said: “As a result of markets pricing in higher base rates over the next five years, this has implications for the traditional five-year or less fixed-rate short-term contracts that many homeowners will be. also used to, now the need for a fixed interest rate in the longer term is increasing while we expect to enter a period of higher inflation and higher interest rates.’
Even before the current explosion in mortgage interest rates, there was a growing consumer demand for mortgages with a longer term.
Figures from the Bank of England show that by 2020 more than half of new home loans will be for five years or longer, driven by consumer interest and attractive rates.
Would long-term solutions help homeowners?
In theory, for some buyers, yes.
Fixed-interest mortgages provide certainty that every monthly repayment is exactly the same. That means homeowners would be insulated from periods of sudden increases in mortgage payments.
The price for that certainty, however, is that monthly repayments are likely to be higher for longer-term deals.
And the key to making a long-term solution is to make them portable — that is, homeowners can move properties and take the mortgage with them.
Why do long-term mortgages work in other countries?
Usually, these deals work similarly to fixed rate home loans in the UK, but with some financial and cultural differences.
The actual nuts and bolts of long-term mortgages abroad are similar to the UK.
The interest that consumers pay on a fixed-rate mortgage is determined by swap rates.
Swap rates are the interest rates that mortgage lenders pay other lenders for the money they borrow.
This affects fixed-term mortgages, as banks normally ‘buy’ money for terms of two, three, five or ten years.
This is directly related to the price of new fixed-rate mortgages, which are normally two, three, five or 10 years long.
In countries like France, where mortgages can be up to 25 years long, lenders have swap rates up to 25 years.
Mendes said, “We’ve always had a tradition of fixed rates for a period of time. But in some countries the idea of anything less than 10 years is a bit of a shock.’
These long-term mortgages are easily transferable (swapped from house to house) and usually don’t have high prepayment fees, Mendes added.
However, to offset risk, many French lenders have stricter affordability rules than their UK counterparts, making life difficult for first-time buyers.
In the US, lenders have the confidence to provide super-long mortgages of up to 35 years due to state aid through lenders Fannie Mae and Freddie Mac.
Founded after the Great Depression, these state-backed lenders operate by purchasing mortgages from smaller lenders.
That eases concerns from smaller lenders about the risk of a 30-year mortgage and helps to enable longer home loan terms.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed-rate contract is about to expire, or because they have agreed on a home purchase, should explore their options as soon as possible.
This is Money’s best mortgage interest calculator powered by L&C that can show you deals that match your mortgage and property value
What if I have to borrow again?
Borrowers should compare rates and speak with a mortgage broker and be prepared to trade to secure a rate.
Anyone with a fixed-rate deal expiring in the next six to nine months should research how much it would cost them to re-mortgage now — and consider getting a new deal.
Most mortgage agreements allow fees to be added to the loan and are not charged until it is closed. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
What if I buy a house?
Those with an agreed home purchase should also aim to secure rates as soon as possible so they know exactly what their monthly payments will be.
Homebuyers should be careful not to overextend themselves and be prepared for the possibility that house prices could fall from their current highs, due to higher mortgage rates limiting people’s borrowing capacity.
Compare mortgage payments
The best way to compare mortgage rates and find the right deal for you is to talk to a good real estate agent.
You can use our best mortgage interest calculator to display deals that match your home value, mortgage size, term and fixed interest needs.
However, bear in mind that rates can change quickly, and so the advice is that if you need a mortgage you should compare rates and then speak to an estate agent as soon as possible so they can help you find the right one mortgage for you.
> Check out the best fixed rate mortgages you can apply for
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