Could 25-year fixed-rate mortgages soon provide borrowers with peace of mind?
November 21, 2024
Category: News
With a general election likely this year, the Labour Party has promised to revolutionise the mortgage market by opening the door for long-term fixed-rate deals that could last a full mortgage term.
The announcement follows many mortgage holders facing soaring bills due to rising interest rates throughout 2022 and 2023.
To tackle high levels of inflation, the Bank of England has increased its base interest rate several times since the end of 2021. As of January 2024, the base rate is 5.25% compared to 0.1% in November 2021. The increase has a direct effect on the cost of borrowing, including through mortgages.
Homeowners that have a variable- or tracker-rate mortgage have likely seen their mortgage repayments increase over the last two years. Those with a fixed-rate mortgage could find their outgoings rise substantially when their current deal comes to an end.
As a mortgage is often one of your largest bills, even a small increase could place pressure on your household budget.
Labour suggests removing regulatory barriers could lead to a shift in the mortgage market
In light of the challenges facing mortgage holders, shadow chancellor Rachel Reeves has proposed longer fixed-rate deals.
A fixed-rate mortgage means the rate of interest you pay does not increase for a defined period. Currently, in the UK, fixed-rate deals often last for two, three, five, or 10 years.
The Labour Party suggests offering fixed-rate mortgages that last for 25 years could provide mortgage payers with greater peace of mind. 25 years is the traditional mortgage term that a first-time buyer would take out. So, it could mean some homeowners take out just one mortgage deal.
Similar mortgages are already common in other countries, including the US, Canada, and Japan. In some of these countries, long-term mortgages are underwritten by the taxpayer, but this is not what Labour is proposing.
Instead, Reeves explained the party would aim to remove regulatory barriers that would help to trigger a broader cultural shift in the mortgage industry. It would be a considerable change for the sector and would have advantages and disadvantages for mortgage holders.
The potential advantages of a long-term fixed-rate deal
It could improve your household budget
The key benefit of a long-term fixed-rate deal is that it could help you manage your household budget more effectively – you’d know what one of your largest household expenses will be for years to come.
For some homeowners, the certainty could reduce stress and provide greater peace of mind.
You may benefit if interest rates increase
As you’d be locking in an interest rate for the long term, if they increased, a long-term mortgage deal could mean you pay less interest over the full term of your mortgage.
It could help you secure a mortgage if you’re struggling due to stress tests
One of the reasons first-time buyers struggle to get on the property ladder is that lenders will often carry out stress tests. These assess the buyer’s ability to continue making mortgage repayments even if interest rates rise.
However, if a buyer was taking out a fixed-rate deal that covered the full mortgage term, these types of stress tests could become redundant. So, it may help some first-time buyers get on the property ladder.
The possible drawbacks of a 25-year fixed-rate mortgage
You’re likely to have a higher interest rate initially
To reflect the certainty a long-term fixed-rate deal offers, the initial interest rate is likely to be higher than comparable short-term fixed-rate deals or those with a variable interest rate. As a result, long-term fixed-rate options won’t be attractive to some mortgage holders.
You wouldn’t benefit if interest rates fell
With a long-term deal, you could benefit if interest rates increased, but the opposite is also true. If interest rates fell, you could be locked into paying a higher rate than alternatives.
You could miss out on lower interest rates on offer when you remortgage
As you make mortgage repayments and if the value of your home increases, the equity you hold will rise. Usually, the more equity you hold in your home, the more competitive the interest rate a lender will offer you.
When a mortgage deal runs out, it often presents a good opportunity to assess the value of your home compared to your mortgage, known as the “loan-to-value” ratio, to access a lower interest rate. With a long-term deal, you could miss out and pay more in interest overall.
It could mean you face an early repayment charge if you move
People rarely remain in their first home for 25 years. Households will often move as their family grows, they gain more equity to take a step up the property ladder, or to improve career prospects. A long-term deal could mean you have less flexibility or may face an early repayment charge if you choose to move during the term.
Contact us to talk about your mortgage needs
There’s no straightforward answer about whether long-term fixed-rate mortgage deals would help homeowners – it would vary depending on individual circumstances and goals. If you’re searching for a new mortgage deal, we can help you assess the different options with your situation in mind. Please get in touch to arrange a meeting.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
| YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT. |
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