'Bring back the 25-year fixed rate mortgage'

Before coming to power they always promise much in their manifestos, but deliver little.

The chief reason for this failure in the UK is short-termism, accentuated by the brief election cycle. Every five years (or even less) sees a change in government

But other democracies are better at long-term planning than the UK. And the consequences from the UK’s failure in long-term strategy are dire, from interest rate volatility to energy and food insecurity.

Take mortgages as an example that hits advisers and their clients particularly harshly just now.

For many middle-class Londoners, a financial noose hangs over their necks.

Any up and comer without rich relatives or much in the way of a deposit may well need a mortgage of £400,000 to buy a home fit to bring up a family. That has consequences.

The interest on a mortgage of £400,000 alone, without repaying a penny in capital, at 1 per cent a year is a highly manageable £4,000 a year, but interest at 10 percent would lead to outgoings of a shocking £40,000 a year, just on interest payments.

This would destroy most ordinary people’s lives.

Even at 5 per cent, just to service the debt and not to make any capital repayment whatsoever, would cost £20,000 a year.

This will inevitably mean financial ruin for many middle-class Londoners by the end of 2023. A financial noose hangs over their necks.

Yet in the UK we are all fixated on the lowest rate of interest possible, which experts say comes though short-term fixes of two years or so. That system is now broken.

Young families bearing huge mortgage burdens cannot live under this black cloud of volatility.

They cannot budget or look forward to the simple joys of life such as the birth of a first child for, who knows, tomorrow everything will be different.

Even the monied classes may worry about withdrawing their children from expensive public schools if they can no longer afford the fees (with their children the innocent victims as their education is interrupted).

Bring back 25-year ‘fixes’

Fixed rate mortgages in the UK for terms as long as 25 years are just not available. According to press reports, they are standard in Canada, Denmark and elsewhere. 

It is time to bring such mortgages back.

My late father, Frank Hawthorne, after retiring from the RAF, was a maths lecturer and part-time insurance broker, trading as Growth Assured Brokers, until a new regime in 1986 made it too complicated to continue.

He bought his first family home in 1956. Then, fixed rate mortgages for 25 year terms were readily available in the UK.

Now there is a lively secondary equity release market. Can we not take a leaf out of this formerly derided sector?

He was happy to pay 1 per cent or so, more for the certainty of knowing his outgoings. This was vital. He was the father of seven children, with school fees for the eldest four at boarding school when the RAF sent him to post-war Germany.

He finished paying off the mortgage in 1981. That year the Bank of England base rate was around 14 percent. In 1956 his fix would probably have been a maximum of 4 per cent.

According to the Daily Telegraph, Michael Gove tried to float the idea of 25-year mortgages but got nowhere. Its time has now come.

There would have to be suitable break clauses to protect consumers every five or 10 years if the prevailing rates went against them. Refinancing would also have to be allowed at a reasonable cost. 

Long-term fixes work in equity release

Switching is now standard in the lifetime mortgage and equity release arena, cleaned up after numerous scandals saw penal interest destroying all the equity in such homes.

Now there is a lively secondary equity release market where borrowers can sometimes get out of onerous deals for a fee if interest rates move against them. And quite right too.

Can we not take a leaf out of this formerly derided sector?

I think of so many aspiring young people buying a home, investing so much hope in the future and at such a high cost.

They are blissfully unaware of a possible financial Armageddon when the BoE’s interest rate hikes really begin to bite.

This doom scenario will hit the 30 to 50-year-olds worse of all.

These workers form the backbone of the economy. They finance their parents’ pensions and do much of the heavy lifting of supporting benefits for the poorest in society through almost penal taxation. Their children are our future. 

Yet, these unlucky souls, who will miss out on decent DB pensions, could find their homes repossessed in a repeat of the 1990s if the BoE is too gung-ho in its efforts to quell inflation.

Give people the choice: pay a little more now for security or go for broke with mortgage roulette on deals too good to last.

Stephanie Hawthorne is a freelance journalist