As mortgage lending rates surge to levels not seen since the banking crisis, some borrowers are wondering whether there is something to be said for the certainty of fixing the borrowing rate for the full term of the loan.
In 2007 two of the UK’s biggest lenders launched 25-year fixed-rate mortgages. They were responding to a call from the then chancellor, Alistair Darling, who suggested consumers would be better off if they did not have to find a new deal every two years, typically paying charges each time.
The rates were not especially high for the time: Halifax and Nationwide both charged 6.39% on their deals, the Bank of England base rate was 5% and, according to data from Moneyfacts, the average two-year fixed-rate was 6.24%. Nevertheless, there was not exactly a stampede at either lender’s branches. Nationwide would not say how many it sold, only that “historically, take-up of 25-year fixed mortgages has been low, with borrowers preferring the flexibility of shorter-term deals of two- to five years”.
In the intervening years, those who opted for a short-term fix will have felt vindicated. When the banking crisis hit in 2008, the Bank of England’s response was to start slashing interest rates. Borrowers on variable-rate mortgages benefited immediately, but as low rates became the norm, those coming off fixed-rate mortgages were able to get cheaper and cheaper deals.
By 2020, when the cheapest two-year fixed rates were below 1%, a borrower who had opted to ride the rollercoaster of rates would have made huge savings, offset only in part by any fees they paid along the way. On a £150,000 mortgage, for example, monthly repayments would have been £1,003 on a rate of 6.39% – but £554 on the 0.83% that was on offer from Halifax two years ago. (Over 25 years, a borrower on the higher rate would have paid £300,757; the borrower on 0.83% would have paid £166,152, had that rate continued for 25 years.)
It seems unlikely that many – if any – borrowers predicted the financial crisis on the horizon and made their decision with that in mind. Rather, at a time when house prices were increasing, they took a short-term choice and were lucky with their timing.
The current cohort of borrowers on short-term deals have been equally unlucky.
When, in 2003, Prof David Miles was asked by the Labour government to examine how the UK could develop a mortgage market in which long-term fixed rates were common, he described their advantages. Almost 20 years later, his words have new resonance.
Among his conclusions was that if the market worked better “many more mortgages would be at rates that were fixed for periods longer than is currently common. More borrowers would then be insulated from the impact of unexpected changes in interest rates at times when the stock of their debt was large relative to their incomes and when the impact of charges in interest rates on the affordability of their mortgages is great.”
Now he says that the UK mindset seems to deter people from paying any more than they need to in the short term. “I think there has been a mindset in the UK that getting on to the housing ladder is what matters and that tomorrow will (probably) be OK once you do that,” he said. To make that happen in a country where prices are high relative to income, borrowers are inclined to go for the cheapest deal possible, whether it is a fixed-rate or variable deal. This is despite the fact that fixing for five years or more means fewer stress tests and might allow you to borrow more money.
Miles notes that in the UK, the long-term fixed rates have tended to come with penalties, so you are stuck on a high rate if base rates go down. In the US, they counter this by allowing people to remortgage on to lower rate, but the cost is borne by everyone – rates are higher than they would otherwise be.
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“If you offered that re-financing option in the UK on long-term fixes, then it would mean that the fixed rate was more often than not above the variable rate – and people often just go for the lowest repayment at the initiation of the mortgage.”
As well as borrowers’ desire for the cheapest deal possible, one industry source suggests that brokers have a role in keeping the market short-termist as they receive fees when a new deal is taken out, and have no incentive to tie in their customers for the long haul.
Concern about keeping options open also seems to be a factor. Although many mortgage lenders now allow overpayments and for customers to “port” their loan if they move home, borrowers think short term equals flexibility.
Neal Hudson, a UK housing market analyst at the consultancy BuiltPlace, said people might have been put off paying more for a longer-term deal because of expectations that prices would continue to rise and rates would continue to go down. He said: “The general experience over the past 40 years has been that – there may have been some short-term pain but in the medium term people have always ended up all right.
“The market has clearly bottomed out now, so will we see a change? Maybe a long-term fix does become more appealing.”
But no one seems to be suggesting a sudden rush for the one 25-year deal currently available – Kensington’s mortgage loan starting at 5.57%. Despite talking about forever homes on TV shows and increasingly extending the terms of our mortgages to three or even four decades, our relationship with rates seems to be resolutely short-term.