Reasonable demand for long-term mortgages

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by Kay Murchie

According to The Council for Mortgage Lenders (CML), there is a ‘reasonable appetite’ for long-term fixed rate mortgage deals but the Government must act if it wants more borrowers to take out these deals. It has already outlined proposals to increase the supply of long-term fixed rate deals, but take-up is very low.

The government first discussed long-term fixed rate mortgages 4 years ago, when the-then chancellor Gordon Brown asked Professor David Miles of Imperial College London to find out why they were so unpopular.

The CML say consumers are concerned that early repayment charges would tie them into deals that could prove poor value if interest rates to fall over the period. They also feared being tied to one lender. Furthermore, mortgage brokers say the lack of flexibility means these products are not appropriate for the majority of borrowers.

These types of deals are favourable in the US, Germany and Denmark as they can insulate borrowers from the impact of varying interest rates.

However, in spite of many lenders offering this type of product, deals lasting over a decade make up for less than 5% of UK mortgages. This is primarily due to the stability offered by longer term deals here is usually accompanied by extensive early repayment charges, often lasting for more than 10 years.

Over 40% questioned by the CML said a fixed rate loan appealed in theory, citing the need for certainty given the expectation that rates will increase in the short-term. However, over 50% of those showing interest in fixed rate deals said they were not prepared to sign up for more than a 5 year period.

Bob Pannell of the CML said in the absence of a major policy intervention from the Government, the take-up of long term fixed-rates looks set to remain relatively small for the foreseeable future.

David Hollingworth from London and Country said until there’s a fundamental change in the design of these products, suitability for consumers will remain limited.