Is there any sense in longer-term fixed rates?
Speaking at the Building Societies Association conference last week, Housing Minister Grant Shapps called upon lenders to begin to offer longer-term fixed rate mortgages of up to 30 years. The concept was met with a great deal of scorn; Guardian blogger Patrick Collinson going as far as describe the idea as “astonishingly bad advice”. However is this immediate aversion justified, or is there actually some logic behind the proposition?
Expanding on the idea, Shapps said:
“Longer-term mortgages - possibly as long as 30 years - could help families on tight budgets know exactly where they stand when they are buying a home, by giving them greater certainty over how much they will be paying for their home in years to come.”¹
But while knowledge can be classed as power, such a move would leave homeowners powerless, imprisoned in a rate that ends up costing them much more than those precious pennies they were trying to save in the first place. Like a child who suffers a broken leg at the beginning of the summer holidays; they are cemented in a rigid cast whilst their friends are outside having a considerably better time of it.
Or in other words, they would be the homeowners who took Alistair Darling’s likeminded advice and plumped for a 25-year mortgage in 2007. Those that did became immobilised by what Collinson perfectly describes as the painful get-out clause; the 3 per cent early repayment charge for anyone looking to switch to a better deal within the first 10 years. Let’s ask them if they feel in control of their finances?
The bottom line remains no one knows what the financial future holds. If forecasts are to be believed UK property is to increase 16 per cent over the course of the next four years. If these projections are true, a much shorter, and thus considerably lower, fixed rate would tide homeowners over nicely. Back to the drawing board Mr. Shapps.
¹Mortgage Solutions (Oct 2011)
Content correct at time of publication