Some homeowners are struggling with soaring mortgage rates, and now housing secretary Michael Gove has called for lenders to offer longer-term home loans as an antidote.
Most UK mortgages are two or five years long, meaning homeowners remortgage often.
This makes it easier to access a bargain when mortgage rates are low, but also means being exposed to higher home loan costs when rates rise.
But in countries such as the US, France and Denmark, fixed-rate mortgages are normally between 20 and 40 years long.
Out of reach: Longer-term mortgages are mostly not offered by big UK lenders
Gove said these longer-term fixed mortgages would help smooth over sudden rate hikes like the ones currently battering UK homeowners.
Speaking to the Telegraph, Gove said: ‘One of the things that I think is right for levelling up overall is making sure we can develop the types of products that are elsewhere in the world… which are long-term, fixed-rate mortgages, so you don’t get the oscillation of how much you pay every two or five years, but you have certainty over as long as 25 years on what you pay. I think that is something we should look at.’
So why are British homeowners and lenders apparently so addicted to shorter mortgage terms – and can longer duration home loans ever take off here?
Why does the UK have short 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 at the right price.
Traditionally, British property owners like a bargain. Many like being able to look across the market every two or five years and lock in the best mortgage rate available at the time.
The same is true for things like insurance and energy bills, where Britons regularly shop around for the best deal – or at least, they did before energy prices started rising in October 2021 and cheap deals vanished.
Short mortgages have another big perk – they make it easier to move house, and more easily fit around big life decisions.
This means mass demand for long-term mortgages has never really existed in the UK.
But many consumers say they would like the option of longer mortgages, but these have been too expensive and with too many strings attached when UK lenders have offered them.
Stepping up: The longer a mortgage is, the higher the interest rate tends to be – although this is not always the case, as at the moment UK two-year deals cost more than five-year ones
Has the UK ever had longer-term mortgages?
Yes.
The last big wave of longer-term mortgages happened in 2007, when former prime minister Gordon Brown issued a rallying cry to lenders to offer these home loans.
In response, lenders including Nationwide, Halifax, Kent Reliance and Manchester Building Society all launched 25-year deals.
The security of these deals came with a price though, as most were at least 1 per cent more expensive than consumers would pay on shorter-term deals.
This was because lenders felt there was a big risk with lending for that period of time.
This combination of high rates, expensive early repayment charges and a related lack of consumer interest meant these long-term home loans all dried up and were quietly removed from sale.
Now, most mainstream mortgage lenders will offer 10-year fixed rate loans at most.
But some smaller lenders have courted attention with longer-term deals.
For example, Habito and Kensington Mortgages have fixed-rate mortgages of up to 40 years in length, while newcomer Perenna plans to launch fixes of at least 20 years later in 2023.
But partly the lack of lengthy mortgages all comes down to cultural differences between countries such as the US and UK.
Martin Stewart, founder of mortgage broker London Money, said: ‘The answer, for me, is it’s about culture, and that takes a long time to change. That is not to say this cannot change, given the opportunity.’
Could long-term mortgages come back to the UK?
Possibly. The current boom in mortgage rates could mean homeowners finally embrace longer-term fixes.
Nick Mendes, mortgage technical manager at broker John Charcol, said: ‘As a result of markets pricing in a higher base rate over the next five years, this has impacted the traditional short term five-year or less fixed rate deals many homeowners will be accustomed too, now the appetite for longer term fixed rate increases amid expectations we will be in a period of higher inflation and higher interest rates.’
Even before the current explosion in mortgage interest rates there has been growing consumer demand for longer-term mortgages.
Bank of England figures show that by 2020 more than half of new home loans were of five years length or more, driven by consumer interest and attractive rates.
Would long-term fixes help homeowners?
In theory, for some buyers, yes.
Fixed-rate mortgages give certainty that every monthly repayment will be exactly the same. That means homeowners would be insulated from periods of sudden rises in mortgage costs.
However, the price for that certainty is that monthly repayments are likely to be higher for longer-term deals.
And the key to making a long-term fix work is making them portable – that is, homeowners can move property and take the mortgage with them.
Why do long-term mortgages work in other countries?
Mostly these deals work in the same way fixed-rate home loans do in the UK, but with a few financial and cultural differences.
The actual nuts and bolts of long-term mortgages overseas are similar to the UK.
The interest consumers pay on a fixed-rate home loan is dictated by swap rates.
Swap rates are the interest rates mortgage lenders pay other lenders for the cash they borrow.
This affects fixed-term mortgages, as banks normally ‘buy’ money over a term of two, three, five or 10 years.
That relates directly to the price of new fixed-rate mortgages, which are normally two, three, five or 10 years long.
In countries such as France, where mortgages can be up to 25 years long, lenders have swap rates of up to 25 years.
Mendes said: ‘We’ve always had a tradition of fixed rates being over a certain period of time. But in some countries the idea of something lower than a 10-year is a bit of a shock.’
These long-term mortgages can be easily ported (swapped from house to house), and tend not to have expensive early repayment charges, Mendes added.
However, to offset risk many French lenders have tougher affordability rules than their UK equivalents, making life tough for first-timer buyers.
In the US, lenders have the confidence to lend super-long mortgages of up to 35 years because of state support through lenders Fannie Mae and Freddie Mac.
These state-backed lenders were set up after the Great Depression, and work by buying mortgages off smaller lenders.
That removes smaller lenders’ worry about the risk of a 30-year mortgage and helps enable longer home loan terms.
