Rachel Reeves has laid out Labour’s pledge to boost the number of long-term fixed rate mortgages available to UK borrowers.
Long-term fixed rates are more widely available in some countries, including the US. But they have never gained widespread popularity, or availability, in the UK.
Here, two- and five-year fixed rates are by far the most popular with borrowers.
Labour wants to change that, to bring more interest rate stability to the mortgage and housing markets and boost affordability.
Boost your borrowing power
In an interview with The Times, shadow chancellor, Rachel Reeves, said that ‘longer fixed-rate deals would enable people to buy houses with smaller deposits and with lower monthly repayments’.
And Labour is already working with the mortgage industry to look at how the long-term fixed rate revolution could work.
Soaring repayments
The announcement comes after a period of soaring interest rates have hit mortgage borrowers hard. Average repayments have increased by hundreds of pounds a month for those who have come to the end of one short-term deal and had to remortgage to a new, higher rate.
Plus, there are still hundreds of thousands of borrowers set to come to the end of a cheap fixed rates in 2024, who haven’t yet felt the full force of the rate hikes.
According to the Bank of England’s latest Financial Stability Report from December 2023, around 45 per cent of fixed rate mortgage deals agreed before the end of December 2021 (when the Base Rate started increasing) are still to renew.
So there’s more pain to come for borrowers.
It added that the typical borrower rolling off a fixed rate between the second quarter of 2023 and the end of 2026 is expected to see their monthly mortgage repayments increase by around £240, or around 39 per cent.
Reeves thinks that locking in for longer could offer protection against fluctuation rates.
She told The Times: “In other parts of the world the housing market is less exposed to changes in interest rates than it is in Britain. More people are locked into longer mortgages. As a result, when you have volatility in mortgage rates, [which] we’ve seen on stilts in the UK, people are less affected in their pockets.”
Long-term fixed rates can potentially boost borrowing power as lenders currently need to stress test mortgages to account for potentially rising rates. That wouldn’t be necessary if the pay rate was set in stone for the long term.
Reeves explained: “Potentially you would be able to borrow a bit more, to put down a bit less of a deposit. If you can take out some of that stress and instability, that will make a difference.”
There are already a handful of long-term mortgage providers – Perenna, Habito One and Kensington, for example – but the products remain far from popular among borrowers and mortgage brokers.
So, what are the benefits and drawbacks to this type of mortgage?
Pros and cons of long-term fixes
Like any mortgage there are pros and cons to choosing a long-term fix. Whether or not they suit you depends on your finances, preferences, stage of life and attitude to risk.
Benefits
Protection from rate hikes
Your pay rate is set in stone for a long period, perhaps the full term of the mortgage. This means it won’t increase, regardless of what happens to the wider economy. This is a valuable guarantee that your mortgage repayments won’t change, even if interest rates rise. For some it offer invaluable peace of mind.
Set and forget
If you fix for the long-term, you don’t have to worry about remortgaging every couple of years. This removes the admin and form-filling that accompanies a remortgage. But just as importantly, it means that you don’t have to go through repeated credit and income checks every few years. If your circumstances have changed, or lenders have adjusted their own criteria you might not meet the new borrowing thresholds. With a long-term fix, you set your rate and forget about it, as long as you meet your monthly repayments in full and on time.
Save on switching fees
Mortgage fees average around £1,000 a time, which adds up if you switch every two years. That’s why it’s so important you take switching costs into consideration as well as your monthly repayments, so you understand the total cost. One benefit of a long fixed rate is that you effectively save on those switching costs. Of course, some mortgages are fee-free, but their rates tend to be higher to offset the fee saving.
Borrow more
Lenders currently need to check you can afford your mortgage repayments now and in the future if rates rise. That’s why they ‘stress check’ your finances at a higher rate than your actual fixed rate, which can limit your borrowing power. With a long-term fixed rate they don’t need to do this because your rate won’t rise (there’s is already flexibility on stress-testing with five-year-plus fixed rates).
Drawbacks
What if rates fall?
You are locked into your rate. That’s great if rates rise because you’re protected. But if they fall below what you are currently paying you may feel disgruntled to be paying over the odds compared to other borrowers.
Higher rates
As a rule of thumb, fixed rates are higher the longer you fix for. The difference in cost depends on prevailing interest rates and sometimes the margin between short- and long-term fixed rates can narrow. But long-term fixed rates are broadly more expensive, as you are also paying for the long-term security of payment.
Penalties for moving
Fixed rates come with early repayment charges (ERCs) if you want to switch or redeem your mortgage before the end of the fixed term. The longer the fixed term, the longer the ERCs usually apply for and they can be up to five per cent of the outstanding mortgage balance. This could make it very expensive to switch your mortgage in the early years. Not only do these fees apply if you switch deal, they are also charged if you redeem your mortgage for any reason, such as selling up due to divorce or even if you move house and the deal isn’t ‘portable’.
