The government’s motto may be that a mortgage is for life, not just for new homes, but lenders and brokers think differently. They say long-term mortgages are inflexible, expensive and out of sync with modern day living. (These loans also do away with lucrative arrangement fees for both parties.)
But for the many homeowners drawing dangerously close to the end of cheap mortgage deals, just as lenders are snatching away any remotely attractive new rates, the idea of a loan that provides a steady rate for up to 25 years might sound like quite a good bet. Borrowers know how much they will have to pay for the period. They are saved the hassle and expense of switching to a new mortgage every couple of years and the gamble of whether their new rate will be higher or lower next time.
As Jonathan Cornell at Hamptons International puts it: “If there is little room for manoeuvre anyway, Darling’s push for longer-term fixed mortgages might unfortunately begin to find leverage.”
Lenders have already started putting out feelers. MoneyExpert.com says mortgages with terms of at least 10 years make up around a tenth of all fixed-rate deals. Borrowing rates are typically around 6.1 per cent, although can go as high as 7.59 per cent, while Woolwich has launched a particularly attractive 10-year fixed rate of 5.29 per cent.
But still many feel the benefits are outweighed by the downsides. Homeowners here seem to regard long-term mortgages as something of a noose around their neck. What would happen when they wanted to move? And what if they divorced? Indeed these are questions the government will have to firmly address before it has any chance of making long-term mortgages as popular as it would like. The UK mortgage market is more mature than elsewhere and borrowers are used to having a huge choice, and very competitive rates as a result.
The mayhem in the mortgage market right now does provide the perfect stage for the government to whip up greater interest in longer-term deals, however. For the last fortnight lenders have been pulling mortgage deals faster than they were launching them a year ago. This week brought more withdrawals.
Many lenders are removing rates that do not even seem attractive to begin with. One of the most dramatic was Nationwide’s move to increase the rates on many of its fixed-rate and tracker mortgages. The lender – in fact one of the least affected by the rise of wholesale funding costs – has effectively priced itself out of the market. Its best new rates are just shy of 6 per cent. Even its standard variable rate – the higher rate borrowers try to avoid by hopping from one two-year deal to the next – is now cheaper than a number of its new “offer” rates. Many deals are higher than the rate at which banks themselves can borrow.
Nationwide said it “sympathises with anyone who is concerned about the availability of affordable mortgages”, but has to protect the quality of service for existing customers. The lender, like many others, has been inundated with applications and has had to take action to stem the flow of new business. The danger for lenders who put up rates by a smaller margin is that other lenders tend to follow suit, and the first lender again becomes flooded with new customers. Unless underlying interest rates come down quickly, this situation is unlikely to change. But few lenders will want to be out of the market for too long. If borrowers can stomach a few months of higher costs, it might be worth waiting for the storm to pass before they jump for that noose.
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