Something that has generated a lot of chatter recently, has been the possibility that, assuming they are elected, Labour will bring in a series of measures intended to offer some quite different options for homebuyers. One of these is the suggested introduction of a 25-year fixed rate mortgage.
Speculation about a new kind of mortgage.
When Labour Shadow Chancellor, Rachel Reeves announced a series of measures that her party were considering to address the housing market early this year, it caused a few ripples in the mortgage community. One suggestion in particular raised an interesting possibility, partly because it has been previously suggested by others in Westminster. She proposed the idea of fixed rate, 25-year, mortgages as a possible way to increase access to the property ladder.
Naturally this was picked up by the mainstream news and the money experts were quick off the mark to start discussing what it could mean. Sadly, this can sometimes cause a little bit of confusion. So, before we go any further, I want to just point out that these are only proposed measures.
At this point fixed rate 25 year mortgage deals are not commonly available in the UK and that is likely to be the situation the foreseeable future.
They are an interesting idea, and they could well shake up the mortgage marketplace if they become readily available, but to repeat, this is not currently the case.
There is a long way to go before they could become common practice. Major changes like this would need to be negotiated with mortgage providers, and the information and training needed to launch the new products would need to also be in place. Of course, this was an announcement by the Shadow Chancellor, so Labour would need to win the next election, and then also follow through with this planned change. Then, even once all those things were in place, the new loans would need to be right for the buyers for reputable advisors to start recommending them.
Would a 25 year fixed rate mortgage be a good idea.
Well, just like all mortgages it would depend on your circumstances. They are actually not a new idea and these kinds of long-term fixed rate mortgages are readily available in some countries. Canada, for example, has a highly developed range of 25-year fixed rate mortgage products and they do seem to be a good solution in some circumstances. That said 25 year, fixed-rate mortgages tend to start with a higher interest rate compared to other loans. Lenders will naturally want to charge a premium for security and long-term rate lock-in. This means borrowers could end up paying more over the life of the loan, especially if interest rates fall over time. A further problem is that, due to the longer span of the loan and higher interest rates, it can take longer to accrue equity in the property. So there are some potential down sides to weigh against the positives.
In the end, any change that would help first time buyers get on the property ladder, would be welcome, providing it is workable and favourable for the borrower. The UK interest rates and property markets tend to be more volatile than other countries, which is just one of the reasons we have more of a history of short-term fixed rate mortgages. That alone may well prove to be a barrier for longer term solutions.
Are long-term fixed rate mortgages going to be an option?
Let’s be practical here. These mortgages are not readily available, and it will take some time for them to hit the market…assuming they ever do. The current mortgage choices for the majority will still be based around:
- Fixed-Rate Mortgage: The interest rate is locked in for a specific period, providing stability and predictability in your monthly payments. This is ideal for those who prefer to budget accurately without surprises from interest rate fluctuations.
- Variable-Rate Mortgage: The interest rate on these mortgages can change, impacting your monthly payments.
- Interest-Only Mortgage: You only pay the interest on the loan each month, with the capital balance due at the end of the mortgage term.
- Repayment Mortgage: The most common type, where you pay both the interest and part of the capital each month. This aims to have the entire mortgage paid off by the end of the term.
The decision to take out a mortgage is about the here and now. Speculation about new initiatives and possible changes doesn’t really help much when you are looking to make a big financial decision. What matters most is what you can afford and what deals will get you the best option for moving into your next home.
When you are considering your next mortgage, come and talk to us. Good advice and the right deal will always be the best option.