This concept could become a reality if recommendations by an influential think tank come to fruition.
Who are they for?
Aimed at first-time buyers primarily, but not exclusively, these mortgages also featured in the Conservative’s recent election manifesto as a way of helping more people into homeownership.
Boris Johnson pledged, back in December last year, to introduce mortgages which would be taken out by first-time buyers who had small deposits of as little as 5% of their property’s value.
They could sign up for a ‘lifetime’ of the mortgage – typically 25 or 30 years – and the rate during this time would never change.
Why do we need them?
Following the Tory’s election promise a think tank, the Centre for Policy Studies (CPS), endorsed these mortgages a credible solution to the UK’s homeownership crisis.
In a report, ‘Resentful Renters: How Britain’s housing market went wrong and what we can do to fix it’, the CPS examined the root causes of Britain’s housing problems.
And the conclusion reached by report author, Graham Edwards, a former property firm CEO, was the introduction of long-term fixed rate mortgages provided an ‘easy solution’.
This is because, these products offered borrowers the chance to take out a loan for 95% of their property’s value – something which few have been able to do since the financial crisis.
It means would-be homeowners would only need to find a 5% deposit in order to purchase their first home, enabling more people to take out mortgages.
How do they work?
Currently, when a first-time buyer takes their initial step onto the property ladder, they can sign up to a tracker or a fixed-rate deal.
Trackers, or variable rates, go up and down according to external factors, usually the Bank of England’s base rate.
Fixed-rates, meanwhile, are – as the name suggests – fixed. You can decide how long you want this rate to be fixed, with the most popular options being two or five years.
However, there are a growing number of 10-year fixed rates, and even a 15-year deal which was launched last year.
These long-term deals would lock borrowers in for the full term of the mortgage.
What are the advantages?
Fixing your mortgage rate for the long term has one main advantage, which is that you will guarantee the rate you are paying for as long as you have the mortgage.
If the Bank of England’s base rate goes up during this time, your mortgage rate will remain the same and you won’t pay more. This works brilliantly if rates go up but if rates go down you could be missing out on potential price cuts.
The chances of rates rising over 25 or 30 years are much higher than over five years, so borrowers could be protecting themselves from long-term interest rate rises.
Other advantages, according to the CPS report, is borrowers would not need to undergo strict tests – brought in following the financial crisis – when applying.
These so-called ‘stress tests’ involve lenders assessing a borrower’s affordability by seeing if they could afford a mortgage rate which is higher than the one for which they applied. The idea here is they factor in future property and rate rises.
But, locking in for the long term, means this would not be necessary, said the CPS.
What are the disadvantages?
On the other side of the coin, locking into a rate for a very long term means borrowers won’t benefit if interest rates fall. Currently the Bank of England base rate is at 0.75%, having only increased twice, in the last decade.
But if it came down, at any point during the 30-year term, borrowers may miss out on the chance to remortgage to a more attractive rate.
There is also a lot of detail which would need to be filled in, such as how early repayment charged would work and what would happen if the borrower moved house?
Graham Edwards, the report author and chair of the CPS’s housing policy group, said: “Owning your own home is a near universal aspiration in the UK, yet owner occupation has been declining in recent years.
“I think we have an obligation to try to help the younger generation get on the property ladder. I hope that my proposals will help many people do just that.”
Would you consider taking out a long-term mortgage? We would love to hear your views. You can leave a comment below or vote in our poll. To vote, scroll down on your mobile phone, or go to the right hand side of your laptop or PC screen to access the poll.
Good loan term mortgage tips.
Thanks