Labour wants 25-year, fixed-rate mortgages to become common in the UK. Is that realistic?
Labour has promised a “revolution” in the mortgage market to open the door to 25-year fixed-rate mortgages for millions of homeowners.
Outlining her plan at the weekend, shadow chancellor Rachel Reeves said longer fixed-rate deals would enable people to buy houses with smaller deposits and with lower monthly repayments.
Longer mortgages are common in countries like the US, Canada and Japan, but unlike in some of those, Labour is not proposing they be underwritten by the taxpayer.
Ms Reeves has asked those involved in carrying out a Labour review of financial services to work with the mortgage industry to find ways to remove regulatory barriers and help trigger a broader cultural shift.
Sky News’ Money team asked three industry experts whether they could take off.
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Shadow chancellor Rachel Reeves outlined the plan
Could they be a success?
Richard Donnell, head of insight at Zoopla, tells Sky News it is a “good idea”, but the challenge will be ensuring rates are as competitive as shorter-term deals, otherwise people won’t be willing to take them out.
The main advantage, he says, would be for first-time buyers.
“Today, the cost of a mortgage and renting is the same, even at 4.5% mortgage rates, but new borrowers are being stress-tested as to whether they can afford 8% to 9%,” he says.
The risk of high mortgage repayments means purchasers – especially first-time buyers – are finding it harder to get on the ladder. As they struggle to get a mortgage, rents have also been rising, leaving people with less in savings. Combined with historically high house prices, first-time buyers are finding it had to put aside the bigger deposits.
“The advantage of long-term fixes is it means you probably avoid the need to stress-test affordability,” Mr Donnell says.
“I believe the government needs to look at how it can support the market for longer-term rates to develop at rates that will support demand for this type of product, as it’s a big mindset change.”
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Mortgage misery across England?
Would Britons really want to lock in?
Kevin Roberts, managing director at Legal & General Mortgage Services, isn’t convinced as things stand.
“It is worth noting that 25-year fixes are already available in the UK, but receive relatively little interest. Typically, people tend to choose the product that offers the lowest rate at that time, and that’s usually a shorter-term product, such as a two or five-year fix,” he said.
David Hollingworth, a director at L&C, agrees.
“There’s potential to grow this sector but until pricing and tie-ins are addressed they may continue to be a useful niche option rather than a market wide choice,” he said.
Two other major drawbacks
Mr Hollingworth highlights another issue.
“Longer-term fixed deals will often tie the borrower in with an early repayment charge throughout the fixed-rate period,” he said.
So if a mortgage needs to be reviewed at some point, perhaps because someone wants to move house, options become more limited.
“Even though deals can be taken to a new property there is no guarantee that the borrower will still meet the lender criteria at that time, or whether the lender will have competitive rates for any additional borrowing.”
Perhaps more obviously, there is also the concern that rates may fall significantly, as happened after the 2008 financial crisis.
“There may be some concern that they will be left high and dry if rates were to subsequently fall,” says Mr Hollingworth.
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Mortgage stats reflect falling rates
What’s already on the market?
The most common longer fix is 10 years. First Direct currently offers a fixed rate of 3.99% over 10 years for a 60% loan-to-value mortgage.
Perenna is a new lender targeting the long-term market, offering rates that are fixed for as long as 40 years but that only tie the borrower in for the first five. They currently offer a 25-year mortgage at 5.75%.
Perhaps recognising the early repayment charge (ERC) issue highlighted above, Kensington Mortgages offers fixed rates for the life of a mortgage and although there are ERCs, they are waived in certain situations – like a house move or sale/repayment.
Who could they benefit?
As discussed, first-time buyers struggling to get on the ladder – but also people who want long-term certainty and perhaps have no intention of moving.
“For example, if they are saving for a wedding in X years’ time, it could be handy to know how much they’ll be able to put away each month if what’s likely to be their biggest expense, their mortgage repayments, stay the same,” says Kevin Roberts, from L&G.
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The average two-year mortgage rate has fallen below 5% for the first time since the Liz Truss mini-budget.
The interest rate charged on a typical two-year fixed mortgage deal is now 4.99%, according to financial information company Moneyfacts.
It means there are more expensive and also cheaper two-year mortgage products on the market, but the average has fallen to a near three-year low.
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Not since September 2022 has the average been at this level, before former prime minister Liz Truss announced her so-called mini-budget.
The programme of unfunded spending and tax cuts, done without the commentary of independent watchdog the Office for Budget Responsibility, led to a steep rise in the cost of government borrowing and necessitated an intervention by monetary regulator the Bank of England to prevent a collapse of pension funds.
It was also a key reason mortgage costs rose as high as they did – up to 6% for a typical two-year deal in the weeks after the mini-budget.
Why?
The mortgage borrowing rate dropped on Wednesday as the base interest rate – set by the Bank of England – was cut last week to 4%. The reduction made borrowing less expensive, as signs of a struggling economy were evident to the rate-setting central bankers and despite inflation forecast to rise further.
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Bank of England cuts interest rate
It’s that expectation of elevated price rises that has stopped mortgage rates from falling further. The Bank had raised interest rates and has kept them comparatively high as inflation is anticipated to rise faster due to poor harvests and increased employer costs, making goods more expensive.
The group behind the figures, Moneyfacts, said “While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding that fiscal event, this milestone shows lenders are competing more aggressively for business.”
In turn, mortgage providers are reluctant to offer cheaper products.
A further cut to the base interest rate is expected before the end of 2025, according to London Stock Exchange Group (LSEG) data. Traders currently bet the rate will be brought to 3.75% in December.
This expectation can influence what rates lenders offer.
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