Homeowners shun longer fixed-term mortgages

The number of homeowners taking out longer-term mortgages has slumped despite several new entrants to the UK mortgage market arguing that European-style home loans can help solve the housing affordability crisis.
Only 390 new mortgages were taken out with a fixed term of longer than five years in August, according to the trade association UK Finance, down from 1,690 in March last year. They comprised just 0.48 per cent of all new loans.
This is even though there are now 12 banks offering a variety of longer-term deals, from the seven, ten and 15-year fixed rates offered by the main high street banks plus the 25 to 40-year fixes available through newer entrants to the market.
British homeowners prefer either two or five-year fixed rates, which accounted for 89 per cent of new loans in August, unlike in other countries including Germany, France, Denmark and the United States where longer-term fixes are more common.
Several lenders have launched these European-style home loans over the past few years, often funded by life insurers or investors rather than bank deposits, in a bet that if the rates were competitive there would be a market for them.
The specialist lender Kensington released fixed-rate loans of 11 to 40 years in November, while two new banks, Perenna and April, have released similar products over the last 12 months. April offers five to 15-year fixed rates and Perenna fixes of 10 to 40 years.
Lewis Shaw, from the mortgage broker Shaw Financial Services, said: “Rates on long-term fixes are significantly higher than standard rates and given how rate-sensitive UK buyers are, they’re not looking to tie into something fixed for 25 years or more when everyone expects interest rates to fall over the next 18 months.”
A 40-year fix from Perenna starts at 5.5 per cent and 5.84 per cent from Kensington, compared with five-year fixes that start from 3.75 per cent. The lowest ten-year fix is 4.49 per cent from Santander.
Shaw also suggested buyers were often wary of newer entrants to the market.
Politicians and economists have touted longer-term loans as a solution to the housing affordability crisis, where in England the average house now costs 8.26 times the average salary, because they allow homebuyers to borrow more with less risk of being affected by changes in interest rates.
The economist David Miles recommended them in a review of the mortgage market in 2004, while they were also mentioned in the Conservative election manifesto in 2019.
However, they have never really taken off because they are both more expensive and less flexible than two or five-year deals. Traditionally they have come with hefty early repayment charges throughout the loan’s lifetime, although the newer loans can be more flexible. Perenna only charges ERCs for the first five years and there can be times such as if you are selling a house when they do not apply.
“I think when rates ease, they may become more popular,” Shaw said. “They are good products that give genuinely flexible options. However, even with the memory of interest rate shocks still fresh in most people’s minds I suspect they’ll still continue to rate shop rather than consider a longer-term view.”
Arjan Verbeek, the chief executive of Perenna, said: “There’s no doubt that it is still early days when it comes to embedding long-term fixed-rate mortgages into a market that desperately needs innovation and a broader range of options to support borrowers. Across the market, it is clear interest rates coming down is causing many prospective borrowers and remortgages to wait and see before committing to a longer-term fix.”