30 year fixed-rate mortgages on the way?
Mortgages are probably the single biggest debt most people ever take out, and for many, it is by far the largest income spend on a month to month basis. Yet when you take out a mortgage, you don’t know how much it is going to cost you every month for the life of the loan- and the newer more stringent affordability checks will interrogate your income to see how your finances would deal with a large fluctuation in interest rates. However, experts predict that soon, you can get a fixed rate deal for 25 or even 30 years, meaning you will always know exactly how much you are going to pay until it’s paid off. Sound appealing?
In theory, there is nothing to stop banks offering extended fixed rate periods at the moment, but the higher cost of longer-term borrowing and the punitive early repayment charges of up to 6% levied by lenders made them an unattractive proposition in the past. The current longest fix available is ten years, but by way of example in 2007 Nationwide offered a 25-year fix that cost 6.39%. During the first 10 years of the loan, borrowers faced an early repayment charge of 3%. Similarly, Halifax released a 6.39% 25-year fix, with identical penalties. At the time, Bank Rate was 5.5% and two and three-year fixed rates were hovering around 5.75%.
But why is this all of a sudden a possibility again? Well there are two reasons. The first is that those pesky interfering Europeans came up with the European Mortgage Credit Directive. Under the directive, which will come into force in 2016, lenders will only be allowed to impose charges that reflect the true cost of a borrower paying off their loan early. No more balloon penalty charges lining lenders’ pockets, but also therefore, making longer term fixes more attractive to punters. Secondly, and crucially, the current difference between the lending rates available to banks on five and thirty year terms has fallen to a new low, making longer term lending cheaper for the banks, who can therefore offer cheaper deals to mortgagees. Win win.
Ray Boulger, of broker John Charcol, told the Telegraph that “there is every likelihood that we will see some lenders offering 20, 25 or 30-year deals by the end of the year.”
“Over the last couple of weeks the spread between five and 30-year swaps has fallen to the lowest point I can remember. Last week it was 0.9 percentage points and while it has gone up since then it is still very low,” Mr Boulger said. “Lenders could offer competitive deals that really appeal to borrowers who are worried about interest rate rises and want long-term certainty over their repayments.”
Andrew Montlake of brokerage Coreco said price and flexibility were key to a successful long-term fix. “There are plenty of people who want the security of a long-term fixed rate,” he said. “Families with young children at local schools are a prime example. But they generally don’t want to be locked in. Rates would need to be similar to 10-year fixes, which are currently priced between 3.99pc and 4.49pc, to be attractive.”
So would you be willing to pay a bit extra (based on the current low interest rates) for 25 or 30 years of payment certainty, or is that just a bit too far into the future to tie yourself to one lender?