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Gove's 25-year fixed rate suggestion

ended 20. June 2023

A journalist at the Daily Telegraph is writing a piece on Michael Gove's suggestion that 25-year fixed rates could help solve Britain's borrowing crisis and give people certainty in relation to their outgoings. Few Qs:

  • Is this a good idea, a bad idea, or an outright ugly idea?
  • Is there a danger this kind of announcement could see people fix into longer term rates at the wrong time?
  • What would a wholesale switch to 25-year fixed rates mean for the business model of brokers? 

Any other thoughts on Gove's statement, wing them across ASAP.

10 responses from the Newspage community

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Editor
Aaron Strutt
Product and Communications Director at Trinity Financial
Longer-term fixed rates are a good idea providing they are flexible so borrowers can easily move home or repay the debt if they are buying with a partner but seperate. Unfortunately most of the lenders do not offer fixed rate mortgages for more than five or ten years, let alone 25 years. If the government want more borrowers to fix in for longer then they will need to take action. It is pretty clear at the moment the big banks and building societies are not going to provide 25-year fixes without some form of intervention. Kensington Mortgage offers a range of fixed-for-term products where the mortgage can be fixed for up to 35 years although they have not been hugely popular. More of the longer-term fixed rates have been pulled in recent weeks and borrowers are taking two-year rates in the hope they can refinance onto a cheaper mortgage next year.
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Rohit Kohli
Director at The Mortgage Stop
The way fixed mortgages work needs to be redesigned for these long-term fixes to work. We love to move or extend our homes and borrow more money to do this. The current system means these may have to take a further advance with the same lender so limiting their market choice or a second charge which is usually more expensive. I've had clients who had fixed for 10 years previously only to decide halfway through that they wanted to move or circumstances have changed (such as divorce) and it becomes even more complicated for them. I think this system could work as long as people accept that these will be more expensive than shorter-term ones and flexibility is limited.
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Michelle Lawson
Director at Lawson Financial
As always, the devil is in the detail but for homeowners to completely tie in for 25yrs will be right for some, like all mortgage products, but not for others. Whilst it can protect against rate rises, if people's situation or the market changes they could be left with limited options and/or penalties to exit. Overall fixed rates are a good option for most as a vast majority of people want the certainty of knowing what their outgoings will be for a period of time however, circumstances and situations do change and closing this off for 25yrs could be dangerous if not structured correctly.
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Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
Gove is right to call for more innovation in the mortgage market, but lenders will have assessed this and don't offer them because they don't see the demand. The pricing would have to be such that lenders offset their risk of future rate rises, so customers would be paying a significant premium on current rates. I'm sure Gove meant well, but the idea doesn't seem thought through.
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Mark Dyason
Owner at Edinburgh Mortgage Advice
25-year fixed rates will redefine the mortgage advice market, but only if the products deliver what the market demands. Other markets where these are successful have very different dynamics around moving home. There is far less moving up the ladder as you can afford to. This means a difficult balancing act is required to satisfy the UK mortgage customer's needs. Launching a 25-year fix would put pressure on a lender to hedge the cost of a very long-term product profitably, but also satisfy the demand to be able to redeem or port with increases or decreases as the client's situation or needs change and manage that without significant penalties. Good luck to the lender trying to spin all those plates.
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Luke Thompson
Director at PAB Wealth Management
Once again, we have someone within Government offering advice on something that they don't have a clue about. First things first, fixed rates aren't for everybody. Who knows if you are going to want to live in a property for the next 25 years? Rates are high at the minute so why would you want to fix for 25 years at a rate in excess of 6%? Hopefully this won't encourage people to fix for longer terms on higher rates as they will be seeking professional advice rather than listening to what politicians have to say.
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Graham Cox
Director at Bridging Hub
Borrowers in many other countries, including the USA, routinely use long-term fixed-rate mortgage deals of up to 30 years. Perhaps its time has come here, though clearly now would not be a good time to lock into an expensive rate for the next few decades. And of course, it would fundamentally change the broker model. The likely outcome would be significantly higher broker fees, and/or procuration fees from lenders.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
I've had too many meetings with clients who took out 10-year fixed rates and then had to pay the Early Repayment Charge (ERC) to escape them, to see this as a good idea without significant changes to product design. The issue is that most people are comfortable with the idea they know what life will look like over the next five years, but beyond that is guesswork at best, so tying yourself into a 25-year legal contract with an exit penalty is going to work out badly more often than not. That being said, if these deals were priced with an ERC that did not go beyond the initial 5 years, then that would significantly change their appeal (as long as the rate was still competitive) and we could see a more widespread acceptance of this type of product.
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Jamie Lennox
Director at Dimora Mortgages
Longer-term fixed like those adopted in the US would take a lot of the issues consumers are facing today out of the equation. However, as a country we love to move houses far more than most so there would need to be contingencies where clients could get out of these deals penalty-free after certain periods. If the market did switch to long-term fixed without doubt we would see a number of firms drop out of the industry altogether. However, it could also lead to a dramatic increase in broker's fees on the initial advice provided. If this type of mortgage was adopted in the UK to make it work brokers would need to see a large uplift in procuration fees to factor in the fact that the bank is keeping the client for 25 years instead of 2-5 years, or introduce a trickle payment where the broker receives income for each year they hold that mortgage.
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Alastair Hoyne
CEO, Finanze Capital at Finanze Capital
Maybe an unusual response from a broker but I love the idea of a 25-year fixed rate. There are people out there who would happily pay a higher rate to have the security that they will know what their mortgage payments will be. We see it with clients on 5-year fixed rates taking this option to avoid the worry of refinance in 2 years’ time. People might fix in at higher rates but if they are the kind of person that would not be on the ball with refinancing and instead sit on the variable rate for months then this 25-year fixed is likely to still be a more cost-effective option for them. I don’t think this would cause brokers to get less business as although you will only see a client once maybe twice rather than every 5 years I guarantee we would see many more new home buyers.