In the midst of the ongoing mortgage crisis and economic crisis in general, experts and policymakers are turning their attention to new solutions to alleviate the burden put on homeowners and hopefully revive the housing market. One potential measure gaining traction is the adoption of longer fixed term mortgages, such as ones currently rolled out in places like Denmark and the Netherlands. Up to 40-year mortgage terms fixed for the entire term are being suggested as ways of avoiding potentially more interest hikes in the future.
The Current State of the Mortgage Market
In recent years, the UK property market has witnessed a surge in home prices, making it increasingly challenging for aspiring homeowners to enter the market. Simultaneously, existing homeowners have found themselves under pressure due to soaring monthly mortgage payments. Particularly in the last few months as the Bank of England’s base rate has risen due to increased inflation. The combination of these two things has led to what some would consider a mortgage crisis, that has left many borrowers struggling to keep up with their financial obligations, ultimately impacting housing market stability.
How 40-Year Mortgage Terms Could Make a Difference
Currently in the UK it is normal to fix your mortgage rate in place for a period between 2 and 5 years with some lenders offering 10-year fixed rate products. This means that your mortgage interest rate will not change for that period of time. When the fixed rate ends, you will need to either switch to a new product and new interest rate or complete your mortgage by paying it off (selling the property etc). Because of the recent drastic rise in interest rates, many people will be coming off fixed rate mortgages of 1% and 2% onto new products of 5% or more. Adding hundreds or thousands onto their monthly mortgage bills.
The Potential Benefits
Looking at how to lessen the impact of rate rises, many people are starting to consider the prospect of longer fixed term products up to 40-years. That would mean that you could potentially fix your mortgage rate and product in place for 40-years without the risk of your rate going up drastically. Here’s how it could work:
- Lower Monthly Payments: One of the primary benefits of opting for a longer fixed mortgage term is the potential reduction in monthly mortgage payments. For example, you could choose a product fixed for 30-years at a rate of 4% and the average mortgage rate in the UK could be 6% meaning that you could save 2% on your rate.
- Improved Affordability: For first-time homebuyers and families with limited financial means, a longer mortgage term could unlock new opportunities. Although nothing has been confirmed, opting to choose a longer mortgage can potentially give the lender more confidence in a borrower and their ability to pay their loan back.
- Stability in Uncertain Times: Leading on from the previous point, economic uncertainties can come at any time and can impact a borrower’s ability to make mortgage payments. In times of job market fluctuations or unexpected financial setbacks, a longer term fixed mortgage term may offer more breathing room to navigate such challenges, reducing the risk of default and foreclosure in the eyes of mortgage lenders.
- Long-Term Housing Market Resilience: As more borrowers gain access to affordable mortgage options, the demand for housing could stabilize and even grow. A resilient housing market is crucial for the overall health of the economy and can contribute to a gradual recovery from the mortgage crisis.
Challenges and Considerations
While the idea of longer fixed terms of up to 40-years presents potential benefits, it is essential to address some associated challenges:
- Accrued Interest: With longer fixed mortgage terms, borrowers could end up paying more in total interest over the life of the loan if the average rate in the UK drops low. For example, you could have your rate fixed at 5% but rates could drop to 3% meaning that you are stuck paying 2% above the odds.
- Impact on Housing Market Dynamics: Critics argue that extending mortgage terms may inflate housing prices further, as buyers might be willing to pay higher prices with the prospect of longer terms.
- Eligibility Criteria: Not all borrowers may qualify for long fixed term mortgages. Lenders would need to assess a borrower’s financial stability and creditworthiness carefully, possibly leading to more stringent lending standards.
Mortgage Advisors Reaction
As the mortgage crisis continues to weigh on homeowners and the housing market, exploring alternative solutions is a step in the right direction for policy makers and lenders, however we are unsure that a decades long fixed deal is the right move entirely. The good thing about fixing your mortgage has always been that within 2 or 5 years, a borrower has the potential to re-evaluate and re-structure their mortgage deal to find a better and more competitive rate. Yes, a longer fixed term deal could potentially offer some relief from temporary rate increases, but it is not the answer to all issues with the mortgage and property market. it will be interesting to see further developments with this idea and what other ideas come about. If you or anyone you know is thinking of getting a new mortgage, speak to our mortgage experts here at Oportfolio. We are here to help.