That is according to Jeremy Russ, head of marketing and compliance at Beacon Mortgages, who commented:
“With interest rates consistently rising you might think that the comparative safety of a 25-year fixed rate mortgage would be very attractive to consumers. However, these products are not ideal for most potential home purchasers especially first-time buyers and non-conforming mortgage candidates.
“How many first-time buyers are going to stay in their first home for 25-years? The answer is – not many. So what will happen when they need to borrow additional funds for their next property? Well, unless they have a mortgage that is flexible, they will be forced to borrow from their existing lender at a price set by that company. Not, a particularly pleasant thought in a market with a tradition of offering new customers the best rates.
“In addition, how many borrowers are going to be willing to lock themselves into a 25–year mortgage with a rate currently higher than many shorter term alternatives? Although the Bank of England base rate is currently rising there is nothing to say it won’t fall back to lower levels in the coming years and those with long-term mortgages may be trapped, with the prospect of high early repayment charges if they want to swap lenders early. A high price to pay for the security of a fixed rate.
“Long-term fixes are also particularly unattractive to consumers who need a non-conforming mortgage. Those with a low credit rating are not going to want to commit to a long-term product with a potentially high rate of interest when their credit rating should recover after a few years. They will then be eligible for a product with a more competitive rate of interest, and eventually a prime mortgage. Flexibility is key when marketing non-conforming products.
“Longer term products might be more popular if they followed the template used in the US where they are based upon models that allow borrowers to refinance to lower rates when rates change in their favour, and without penalty. Currently, nothing like this is available in the UK, which does not bode well for the future of the long-term fixed rate mortgage.
“The government’s eagerness to encourage 25-year fixed rate mortgages smacks of shutting the stable door once the horse has bolted. Gordon Brown would be well advised to concentrate his efforts on relaxing planning laws and building more houses in order to cut the problem off at its source. It’s simple supply and demand economics. An increasing and more prosperous population coupled with low numbers of vacant houses means that prices will inevitably rise. By increasing the supply of houses the government has the power to shift the economy to a more developed level.”
