Housing Minister Grant Shapps recently called for lenders to offer 30-year fixed rate mortgages and received a barrage of abuse. Simon Webster, from mortgage broker Facts & Figures, below, says it wasn't all nonsense.
UK mortgage terms usually run for 25 or sometimes 30 years; but a typical fixed rate period is between two and five, or occasionally, 10 years, before reverting to a variable rate.
In the US, full term fixed rate loans are very common, but in the UK they are almost non-existent.
Grant Shapps recently called for change. He was immediately pilloried in some quarters; for example, under one headline, "Astonishingly bad advice".
That's a bold headline but one based exclusively on recent history. As it is always easy to be wise with hindsight, the real question is whether taking a long term fixed rate mortgage now is really such a bad idea.
Recent figures from financial adviser search facility unbiased.co.uk showed the rate homeowners would be prepared to fix at is 3.4%. That's perhaps a little unrealistic, as well as out of touch, given today's market conditions and the current higher fixed rate offers on long-term deals.
Having said that, 46% of homeowners still haven't reviewed their mortgage at all since March 2009 when the base rate first hit 0.5%.
So would you win with a long-term fix?
If one accepts that the historical mid-market interest rate for mortgages is around 6% then for much of the noughties you could safely say a five-year fix was a 50:50 bet as to whether rates would go up significantly, as many fixed around 5%. So then we recommended a lot of variable rates.
Over the last 30 years, I have seen mortgage famines, deregulation, special offers to attract new business, interest rates of 15% and now some tracker rates of under 1%.
Looking at long term rates, historically, if you'd fixed at 5% or less you'd have been better off, but over the last few years you'd have been worse off because of artificially low rates.
Fixing now at 5% or less, the balance of probability says you'd win. But it's also up for debate that we could be looking at a new world economic order where long-term low rates are the norm.
But for a new loan today (subject to pricing and availability) I would give long term fixes serious consideration – interest rates cannot fall off the floor.
The one thing I have learnt it is that it is hard to predict what will happen next year, and impossible to predict what will happen over the next 25, or more. So is taking a fixed rate loan now good or bad advice?
Clearly the two things to avoid are fixing your mortgage only to see variable rates slip below the level you have fixed (as happened to many in the noughties) or taking a variable option only to see that variable rates rise above the fixed rate that you could have had.
If a borrower fixes at 5% and variable rates go to 10% they save a fortune but if, as many people did in the noughties, borrowers fix at 5% and variable rates move to 2 or 3%, they could now be paying considerably over the odds.
As a borrower, the first thing to remember is that they are your repayments. So you must ask yourself what you think is going to happen to long term interest rates.
If you don't really know you should discuss the balance of probability as to whether rates will rise with your adviser.
For those considering a new mortgage today there is the choice between a variable rate and a more expensive long term fixed rate or a mixture of both. There are five principal considerations:
- As rates could rise after a fix ends, could you comfortably afford more expensive repayments? If yes, a fixed rate is worth at least considering. If no, should you be taking out a mortgage at all? Rates will surely go up one day.
- Are your circumstances likely to change? If you may need to move or may have some money come in and want to redeem early there are likely to be significant redemption penalties on any structured mortgage, especially long term fixed rate deals.
- Lenders are not charities; they exist purely to make money. So they will never offer a long-term fixed rate at a level they think they will lose money from.
- Do you think variable rates will go up or down from where they are now? If up, do you think they will go up by more than the extra cost of the fixed rate now? For how long? Do the maths or get your adviser to do it for you.
- Are you prepared to pay extra now and perhaps extra for the duration of the loan for the insurance of knowing exactly where you stand every month? The tighter your budget today, the more you should really think about this point.
The only question left unanswered is whether the lenders will take any notice of Grant Shapps.
Views expressed are not necessarily those of MoneySavingExpert.com.