Why Labour’s 25-year mortgages don’t add up
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Labour has pledged to turbocharge homeownership in Britain with American-style fixed-rate mortgages spanning more than two decades.
The deals have also been toyed with by the Conservatives – but are yet to catch on with British borrowers. Costs remain higher for long-term loans and currently only a handful of lenders offer them.
Despite a recent flurry of long-term fixed-rate products, with more than 200 now on offer, they have been slow to match the flexibility of shorter term rates.
Just 1pc of mortgages signed in the year to October 2023 had fixed interest terms of more than five years, according to UK Finance.
Shadow chancellor Rachel Reeves told The Times: “In other parts of the world the housing market is less exposed to changes in interest rates than it is in Britain. More people are locked into longer mortgages.
“As a result, when you have volatility in mortgage rates, [which] we’ve seen on stilts in the UK, people are less affected in their pockets,” she added.
Ms Reeves said 10 or 25 year mortgages would remove the need for “stress testing” by lenders.
The credit check sees loan applicants approved on the basis their finances can handle a worst-case scenario interest rate increase of around 8pc. By removing this, it is thought the path to homeownership would become easier for millions of would-be buyers.
Experts have pointed out that British buyers prefer to shop around for better rates every few years and fear missing out on low interest deals in the future by locking in long-term.
Richard Donnell, executive director of Zoopla, said that there would be no market for longer term rates in the UK unless a future government stepped in.
He said: “We have been talking about this for quite some time now and clearly the market isn’t there to get the mortgage rates at the right level.
“Very few [lenders] do mortgage terms of over five years because those rates are always a little bit higher.
“The Government would have to get involved and help start this market,” he said, adding that expanding the mortgage guarantee scheme could be one solution.
Unintended consequences
This would allow more first time buyers on to the property ladder, but potentially with a knock on effect.
Mr Donnell said: “It will probably boost house prices if first time buyers were able to buy with fixed rates.
“If you’re a first time buyer and you’re looking to buy the home you rent, even at 4.5pc [fixed-rate], it would be cheaper to buy than to rent than most of the cheaper regions in the UK. In the south of the UK it gets more expensive.”
Andrew Wishart, senior property economist at Capital Economics, said longer fixed-rate mortgages had caused problems in the US market amid high central interest rates.
He said: “The vast majority of the time it’s going to be much more expensive to fix for 25 years than for two or five.
“The obvious comparison is the US. In the UK, we historically have more variable rate mortgages and now we have shorter two or five year fixes.
“In the US the big thing we have seen is that where everyone has a 30 year mortgage interest rates have gone up to 7pc.”
He added that the number of homes listed for sale had “dropped to the floor” because most longer mortgages cannot be transferred to other properties.
First Direct currently is offering 10-year fixed rate deals for as low as 3.99pc at 60pc loan-to-value, while Prenna and Kensington have deals that have fixed interest for the life of the mortgage.
Perenna’s 25-year fixed offer is at 5.75pc at 90pc loan-to-value, while Kensington’s is 5.6pc for 60pc loan-to-value.
The Government has previously signalled its interest in longer mortgage terms. Michael Gove proposed rolling out longer fixed terms in the summer when ministers were also reportedly eyeing Dutch-style 40-year terms.
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