It's been a turbulent and unsettling year for many mortgage holders, with a significant rise in interest rates pushing up the cost of borrowing.
This has resulted in many people with mortgages facing considerably higher monthly repayments when their existing fixed term deals come to an end.
It also means that some first-time buyers may now not be able to borrow as much as they had originally hoped for.
I think it's time that the UK model offered more options to borrowers and longer-term fixes should be part of that mix.
This has been a particularly challenging year for those whose borrowing relative to their income is higher.
One of the tools some people have utilised is extending the length of mortgages to allow them to reduce their monthly repayments in the short and medium term. However, this is something that also comes with significant downsides.
Borrowers will pay more interest overall as they will be making repayments for longer; it could make it harder to buy their next house as they will have paid off less capital than they would have with a shorter mortgage; and it reduces future flexibility – if they start off on the maximum length a mortgage lender will offer, there’s no room to extend it should they face financial difficulties in the future.
However, there have been fewer options available should anyone want a longer fixed-rate on their existing length mortgage.
The current mortgage model in the UK is based on borrowers regularly refinancing two or five-year fixed-rate deals.
This has often been the best strategy for borrowers, allowing them to go for the lowest initial rate and then refinance when necessary, with interest rates generally trending downwards.
And the major mortgage lenders and mortgage brokers – who receive regular repeat custom each time borrowers have to refinance – have been happy to oblige.
This model has generally suited both parties. However, it also leaves borrowers vulnerable to huge repayment increases when their terms end, should we see a sudden interest rate spike like we have over the past 12 months.
In other advanced economies, where long-term fixed-rate mortgages are more common, the issue has been less impactful, with far fewer refinancing points through the life of the mortgage, there is much less risk to borrowers.
Recent data from the European Mortgage Federation shows that in Belgium 92 per cent of mortgages are long-term fixes of more than 10 years. And In Germany and Denmark the majority of mortgages are also fixed for more than 10 years.
In the UK however it is very uncommon to find someone on a fix this long, with less than 6 per cent of the population having a fix that is longer than five years. There are very few long-term products available to UK borrowers.
Offering bigger choice in this respect wouldn’t just help those with existing mortgages, but would be beneficial to first-time buyers too.
