The Bank of England has said it is “open mind[ed]” to mortgage terms “much longer” than the UK is currently used to, pointing to other countries where much longer, fixed-rate home loans “function perfectly”.
Asked whether mortgage terms as long as 40 or 50 years are a good idea or pose a potential risk for borrowers, central bank governor Andrew Bailey said at a press conference today (July 5): “Our approach is that we will support and engage in any process which wants to envisage innovation in the market.
“It’s something we would certainly support a review of to see what is possible in the market. If it comes forward we will certainly play our part in it.”
Last week, the UK government said it was considering “ultra-long” mortgages as one of the “creative ways” it could help more first-time buyers afford a home against the backdrop of rising living costs.
Longer term mortgages are not common in the UK, with two and five-year deals being some of the most common.
A number of lenders now offer 25-year fixes, and the maximum fixed term on the market is currently 40 years.
In the Bank’s Financial Stability Report, it referenced the likes of the US and France, where mortgages tend to be issued at fixed rates for the majority of their term.
“Households with such mortgages are, therefore, less exposed to rises in interest rates, though they could still be exposed to other cost of living pressures,” it explained.
“In many other countries including the UK and Spain, while fixed rate mortgages are prevalent, they are typically fixed for a much shorter duration.”
In the press conference today, the Bank of England’s deputy governor for prudential regulation and the chief executive of the Prudential Risk Authority, Sam Woods, said the Bank had “a completely open mind” on longer term mortgages.
“There are other non-UK markets which function perfectly well which do have much longer, fixed-rate mortgages,” he added.
“I think not often 50 but much longer than we're used to. So I think if such a product came forward in the market we’d approach that with an open mind.
“Our job would be to make sure the prudential regulation could be adapted as needed to capture any risks that came with that.”
Some brokers have hit back at the consideration of longer term mortgages, arguing the government is ignoring the real problem - the lack of housing supply.
Others reckon there is a bigger opportunity in 30-year fixed mortgages, labelling a 50-year term too expensive in the long run, and too risky in terms of locking consumers into undesirable interest rates.
Others, however, think it could be a good idea. Financial planner at the Orchard Practice, Joshua Gerstler, said it will enable more people to buy a home by allowing them to spread the cost over a longer period, reducing their monthly repayments.
“The downside is that they could be paying a mortgage for most of their lives,” said Gerstler.