Another bright idea from Shapps

20 October 2011 | By Natalie Thomas

Perhaps Shapps heeded his words because today he seems to be anything but invisible - but unfortunately he is making himself known for all the wrong reasons.

Following on from his words of wisdom about mates mortgages in July, Shapps served up his latest offering on how to solve the mortgage crisis today - 30-year fixed rate mortgages.

You would have thought Shapps would have learned from his previous backlash and actually run his idea past someone in the current mortgage market before declaring it at the Building Societies Association conference today.

As if to test the water, the speech was leaked yesterday by the Department for Communities and Local Government to some of the national press, so even before he gave the speech at mid-day today he already had a good idea that it would go down like a lead balloon.

If he had consulted someone in the industry before revealing his latest idea, they would have told him that the industry has been there, done that and failed.

Back in December 2003 then chancellor Gordon Brown, commissioned David Miles to examine why long-term fixed rate mortgages were so unpopular in the UK.

Miles found that even though some of these deals worked out to be cheaper, consumers were shunning the idea because they were unwilling to sacrifice a lower initial rate despite guaranteed that the rate would not go up in line with the Bank of England base rate.

This did not stop lenders from having a go though and a number of lenders over the years such as GMAC-RFC, Nationwide and Leeds & Holbeck have all launched 25-year fixed rates with many of them withdrawing them just months later because of funding issues or due to a lack of demand.

Kent Reliance was the last lender who offered a 25-year fixed rate mortgage and it pulled out of the market six months ago.

Setting aside the fact that Shapps announced the plan at a conference for building societies - many of which would not have the funding model to fund a 30-year fix - the most startling thing about Shapps’ idea is his reasoning behind it.

He says: “In today’s uncertain world, people want to know where they stand. Yet when it comes to buying a home, there are no mortgages available for them where they can fix their payments for a long time - the longest fixed-rate mortgage for many is five years.

“Longer term mortgages - possibly as long as 30 years - could help families on tight budgets know exactly where they stand when they’re buying a home, by giving them greater certainty over how much they will be paying for their home in years to come.”

His speech comes on the same day as research from the Council of Mortgage Lenders shows around 1.8 million mortgage holders whose fixed rate deals have come to an end are paying on average £2,600 a year less on their lender’s reversionary variable rate.

Over half of the 1.8 million borrowers now on reverted variable rates have more than 10% equity and could potentially remortgage if they wished to.

Longer-term fixed rates might create more stability for borrowers but at what cost? Even if the deal comes with no early repayment charges this in turn would create a higher initial rate, making it even more unaffordable for people struggling financially.

Shapps will no doubt grab the headlines today and tomorrow with his recycled ideas, but until he gets to grips with the market he is representing and addresses the issues that are facing it, in the words of Sinclair, he might as well be invisible. 

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