Mortgage costs to rise: Is now the time for 25-year deals?


ORTGAGE costs are going up as banks get ready for an increase in interest rates from the Bank of England. Is now a good time to re-mortgage?

The common consensus seems to be yes – but move fast.

On Wednesday this week, shortly after Chancellor Rishi Sunak concluded his budget, several lenders upped rates on fixed rate deals. Halifax, NatWest, Santander, HSBC and others all moved promptly on the chance that there is a rate rise as soon as next week.

While those increases by the banks don’t immediately affect those on fixed rate deals, it will later. The typical mortgage will cost hundreds of pounds more a year to service.

The Office for Budget Responsibility has warned homeowners to prepare for a 13% increase in mortgage costs by 2023.

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The Bank’s Monetary Policy Committee meets on Thursday to ponder a rate move. The decision looks to be on a knife edge.

The views of Ben Broadbent, the deputy governor and former Goldman Sachs man, may be key here.

New chief economist Huw Pill, also a former Goldman Sachs man, told the FT the other day: “It is finely balanced. I think November is live.”

One City sage noted: “I think they will hold rates, but it is a coin toss. No one knows which way they will go for sure. Except perhaps Goldman Sachs.”

From 0.1%, Bank rates really only have one way to go. Fix your mortgage now then?

Elliot Nathan at broker Eddge said: “Interest rates have been at their lowest in UK history and now would be the time to secure a fixed rate before we start to see rate rises. With some fixed rates under 1% it would be prudent to explore longer term fixes such as 5-year fixes which will provide security for the medium term.”

So, five years. What about longer than that? The idea of longer-term deals, 15 or 25 years long, have been around for a while without ever taking off.

At the Tory party conference in October 2020 Boris Johnson gave his support to increasing the length of a typical mortgage from three years to 30.

“We believe that this policy could create two million more owner occupiers, the biggest expansion of home ownership since the 1980s,” said the PM.

What happened after that? Mostly nothing. Lenders aren’t that interested in the idea and neither it seems are borrowers.

Nathan again: “The UK market is more varied than the US or European ones. UK homeowners are used to low interest rates whilst changing their mortgages every 2-5 years to take advantage of low rates. The idea of long-term fixed rates has not taken hold in the UK despite attempts from various lenders. Even 10-year fixes struggle to sell.”

So UK borrowers have been willing to sacrifice long-term certainty for the chance of chasing a new, perhaps better deal, every few years.

One problem with long term deals is that they tend to come with chunky early repayment charges if the mortgage is redeemed during the fixed rate period.

Perhaps that is changing as lenders get more innovative.

Rothesay, a pension specialist, is poised to dip its toe into the market offering longer dated mortgage deals of perhaps 25 years.

It told the FT: “Through these new products, we’re delighted to support increased home ownership in the UK, helping the government’s ambition to bring mortgages to the market which offer long-term certainty.”

Exact details of the product are not yet known.

Last March, Habito launched a mortgage with a loan period of up to 40 years. The rates start at 2.99%. That looks expensive compared to the best five-year fixes of 1.7% or 1.8% available now.

But it might quickly look cheap if rates rise rapidly.

The 25-year mortgage deal could be an idea whose time has come.