Shapps calls for 30-year fixed rate mortgages

20 October 2011 | By Natalie Thomas, Tessa Norman

Shapps is believed to want to spark a debate on longer-term fixed mortgages as a “normal and sensible choice”.

Shapps will say that longer-term products will ensure “people know where they stand”, as they will give consumers greater certainty over the costs of buying a house in the long term and allow families on tight budgets to know exactly how much they will be paying for their home in the future.

He is expected to say: “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.”

He will argue that government wants to see stability in the housing market and with interest rates in the long term, and that more long-term products coming on stream could help deliver this, alongside the ongoing deficit reduction efforts and the FSA’s Mortgage Market Review.

But the minister will also say that consumers have deep-rooted expectations that they can and should be able to shop around for a better rate and do this frequently during the term of their mortgage.

He says greater use of ‘portable’ deals – where borrowers are able to move house and keep their existing mortgage, and ‘cap and collar’ arrangements where the interest rate on a loan can only move within limits and borrowers are not liable to sudden repayment increases and could make longer deals more appealing to consumers.

Speaking ahead of Shapps’ speech, Peter Griffiths, chief executive of Principality Building Society and chairman of the BSA, says: “This idea raises some key questions, particularly for small societies, who may find it difficult to fund.”

Paul Broadhead, head of mortgage policy for the BSA, says it welcomes the prospect of an inclusive debate on any measures which will help lenders lend and consumers borrow.

But he says: “Longer-term fixed rate mortgages have been offered in the past but with limited consumer demand, ten-year rates are currently available. Lenders do respond with new products where that demand exists.

“The challenge with fixed rate mortgages is always the balance between price and flexibility for the consumer. This the more expensive it is for lenders to fund with the knock-on higher cost to consumers. We are keen to hear more about the Minister’s ideas on new sources of long term market funding.

“We would certainly not advocate a ‘one-size fits all approach’ to mortgages. It is right for lenders to offer a range of products which suit the different needs of individual consumers.”

The Council of Mortgage Lenders believes such products can be attractive to some borrowers.

But it says research that it published in December 2007 showed these types of deals are unattractive to customers because they are concerned that subsequent interest rate movements mean that the deal looks unattractive after they have entered into it, in which case they either have to live with the fact that their mortgage is less attractive than prevailing rates, or pay an exit fee to redeem it early and remortgage.

The trade body says one way around this would be to factor in the cost of “pre-payment” to the headline rate so that exit fees are minimised. But it says this would typically add at least 0.5% to the headline mortgage rate, and there is little evidence that UK consumers are prepared to pay this level of premium for the unquestionable benefits of certainty that a long-term fixed rate would provide.

But the trade body acknowledges that market conditions have changed since 2007 and attitudes can be fluid. It says if there is a greater appetite to seek long-term relationships of value, rather than short-term deals predicated on regular remortgaging, lenders will undoubtedly respond, and the CML will be keeping the issue of long-term fixed rates under review.

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat