Will we see the return of 25 year fixed rate mortgages?
Long term 25 year fixed rate mortgages are not new to the UK market. As I write this post there are options available from some lenders now. However, under plans being discussed by the Labour party, we could see them return to the mainstream. Combined with a big push to change the mindset of UK borrowers.
25 year fixed rate mortgages, what are they?
Basically, it’s like it says on the tin. They are mortgages where the rate of interest you pay remains at the same level for 25 years. This means that your monthly repayments will remain stable for the entire 25 years. Assuming you don’t increase the borrowing at a later date. For example: if you were to borrow £200,000 over a term of 25 years using one of these longer-term deals. A borrower would pay the same repayment each month until the mortgage ended.
The shadow chancellor, Rachel Reeves, has dropped hints that a review of the financial service market could unlock opportunities to increase the uptake of longer term fixed rate deals. These could be useful for first time buyers. Mainly by eliminating the requirement for lenders to apply a stress test when they assess affordability.
At present a mortgage lender won’t look at the percentage rate that the client is going to pay each month when assessing whether or not they can afford the loan. Instead, they apply a stress tested rate which could up to double the payable interest rate. By eliminating this requirement on the basis that the monthly repayment will not be subject to change, lenders can be more comfortable that their money will secure in the long term.
This could then unlock mortgages with lower deposit requirements or offer an enhanced loan amount.
On paper this sounds great. However, they haven’t taken off in the UK as well as they have in Canada, the US and Japan. In some of these countries, government’s have offered security guarantees to lenders ensuring that they are offered at a competitive rate. It is unclear whether the same assistance would be offered to UK lenders.
What are the potential drawbacks?
As with most mortgage deals, customers are drawn in by headline interest rates. Mortgage lenders are likely to price their long-term fixed deals at a slightly higher margin than their shorter term offerings. Alternatively, they may charge larger arrangement fees to offset the fact that they may not be churning their remortgage deals as often as they do currently. When pricing a product for market the lender has to balance their profit margin on the deal, against the market movements and estimated risk of falling house prices covering a 25-year period. It is unlikely that products fixed at very low rates will be offered over a period of 25 years.
Between 1995 and 2022, the average mortgage rate in the UK was 5.62%.
For the borrower to be tempted away from shorter-term 2-5-year fixed rate options that could potentially be cheaper, the lender may need to think more creatively.
Fixed deals include early repayment charges if the mortgage is repaid or switched to another deal within the penalty period. Usually this matches the length of the fixed interest rate itself. However, first time buyers are not expected to remain in the same house for the next 25 years. So, they may be put off by potential charges to pay when they inevitably move. In these cases ,they may be drawn to a more attractive shorter term option.
Flexibility will be key.
Lenders may have to offer shorter penalty periods or windows where the mortgage can be switched penalty free. Simply in order to provide the flexibility that many require. There may be the option to move the existing mortgage to a new house (known as porting) to avoid charges. However, this is always at the lender’s discretion and there will be no guarantee of acceptance. Especially if circumstances have changed from the original application.
Also worth considering is the potential for interest rates to drop massively from their current level again. How would borrowers tied into 4.50% 25 year fixed rate mortgages feel if a sustained period of much lower rates, similar to those experienced after the 2008 financial crisis, were to occur.
Who could benefit from 25 year fixed rate mortgages?
25 year fixed rate mortgages may benefit first time buyers. Those who are being penalised by the affordability stress tests, or those with a lower deposit.
Customers who cannot see themselves moving from their current property for a long period may also see benefits in the long term. It would offer a simple solution at a single monthly payment. There would be no concern about interest rate fluctuations. Sudden jumps in monthly mortgage repayments could also be avoided. Therefore, long term fixed rate deals would insulate the borrower from unforeseen issues within the economy. At least when it comes to their mortgage.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
