Long-term fixes and evolution of mortgage market ‘long overdue’

With the Bank of England base rate now sitting at 5 per cent, mortgage borrowers at the end of their fixed-term deals are now faced with significantly higher monthly repayments than when they first entered into them. 

The situation is so dire that the government this week announced a mortgage charter, signed by 30 lenders, to help support mortgage borrowers. 

The pressure that rising interest rates are putting on borrowers has led some brokers - and housing secretary Michael Gove - to say that an overhaul of the UK’s lending space is needed and that longer-term fixes should become a greater feature of the market. 

Longer-term fixed mortgage rates are commonplace in other European countries such as Belgium, France, Germany and the Netherlands.

According to a 2021 report from the European Mortgage Federation, while most mortgages in countries like the UK and the Czech Republic have a fixed rate they are mostly below 10 years. 

By comparison in Belgium and Denmark, most mortgages have fixed-rate periods above 10 years.

Source: European Mortgage Federation, 2021

Speaking to FTAdviser, mortgage adviser Austyn Johnson, the founder of Mortgages for Actors, said he explored buying a house in Italy four years ago that had a 2 per cent fixed-mortgage rate for life available on it. 

About three years ago, a client of his got the same deal when he decided to emigrate to Milan.

“Fixing for life is very common there, how I wish I had taken it up,” he said.

“If the UK can afford fixing deals for life, the troubles with affordability at remortgage time are gone,” he added. 

Johnson said as a mortgage adviser, he knows a move towards a market like this would be “shooting himself in the foot”, but he said if it is the best course of action for borrowers it warrants being pursued. 

The UK

UK Finance director of mortgages, Charles Roe explained that part of the reason longer-term fixed rates have not taken off in the UK is because of customer concerns that interest rates might move or that they might have a change in circumstances. 

“Demand for these products is typically very low,” Roe said.

“There is nothing in the regulatory rulebooks that prohibits longer-term fixed deals being offered by lenders - the market is competitive and innovative and would be able to respond if the demand were there.”

If there was a balance between flexibility, stability, costs and exit where necessary, we could see more recommendations  Justin Moy, EHF Mortgages

Likewise, a spokesperson for the Building Societies Association said it was a question of demand. 

"Long term fixed rate mortgages have been available in the mortgage market many times. There have been a number of 10 year fixed rate products on the market recently, but there is a limited take up from consumers. 

"Consumer demand is largely for initial fixes of under five years, with 97 per cent of fixed rate mortgages taken out on these products with building societies.”

The spokesperson added: “Additionally, the Scandinavian countries use matched funding (usually covered bonds) to provide the longer term rates, whereas this source of funding is less common in the UK."

According to Moneyfacts, the only lender in the UK that offers any fixed for life products is Kensington Mortgages.

While the number of lenders who offer 10 year fixed-products is much greater, FTAdviser reported that at the end of May many had begun pulling them from the market as interest rates rose. 

This week there was 145 10 year fixed-rate products available on the market, down from 169 in mid-May.

Brokers’ views

Henchurch Lane Financial Services mortgage broker, Dylan Kenney said that while the ability to budget, the peace of mind and the stability offered by long-term fixes are “wonderful things”, higher early repayment charges on longer-term fixes are generally off putting for borrowers. 

As is the “lesser ability to review your mortgage more freely when the things you cannot foresee in life occur”.

“Whether you should fix for any period is down to personal circumstances in every case, which is why speaking with a whole of market professional who can help evaluate your situation could be the difference between spending or saving hundreds, or thousands of pounds,” Kenney added.

Others in the sector agreed that the inflexibility of longer-term fixes are what make them unattractive to many in the UK. 

We would need to see a fundamental change in how mortgage products are designed, moving in the direction Kensington tried last year with their longer-term effects,” Justin Moy, managing director of EHF Mortgages said.

Moy gave the example of a romantic relationship not working out as an example.

“If there was a balance between flexibility, stability, costs and exit where necessary, we could see more recommendations.

"But when you look at say a 10 year fixed deal for first time buyers, who may split in two years, and they face a 6-7 per cent early repayment charge to break their mortgage deal early, you can see why that deal will not work,” Moy said.

Graham Cox, the founder of SelfEmployedMortgagesHub.com said that in hindsight, fixing for 10 or even 15 years was the “steal of the century”, with the only downside being the early repayment charge.

“Particularly when you add up all the product fees, valuation fees, and potential legal costs of remortgaging every few years,” Cox added.

Rob Gill, the managing director of Altura Mortgage Finance noted that these early repayment charges are not a feature of many of the long-term fixed rate products across Europe. 

“Long-term fixed rates are commonplace in much of Europe and the US, giving borrowers the peace of mind of a stable rate on their mortgage for 10, 20 or even up to 30 years,” Gill said.

He added: “The evolution of the UK market in this direction is long overdue and the industry should seek to learn from highly successful, popular products used widely in other countries.”

jane.matthews@ft.com