A commentary from the Tony Blair Institute for Global Change has suggested that the UK housing market is in need of long-term fixed rate mortgages as a safeguard against rising interest rates.
The institute’s Future of Britain initiative, which seeks to deliver a greener, healthier, and more prosperous UK through policy reform, has been focusing on this issue amid growing concerns over the affordability of mortgages.
Various recent reports, including those from the Resolution Foundation, the Bank of England, and the Institute for Fiscal Studies, have shown that the UK’s mortgage holders face a significant financial strain as low fixed-term mortgage deals are coming to an end.
As a result, borrowers may have to grapple with higher monthly repayments once their mortgage terms are up for refinancing.
The institute points out that such issues are less prevalent in other advanced economies, where long-term fixed rate mortgages are common. These types of mortgages shield borrowers from unexpected hikes in rates as they do not need to refinance.
In the UK, however, such products are scarce. In its 2022 report, the institute investigated the barriers to the provision of long-term fixed-rate mortgages and found both demand and supply-side hurdles.
The commentary reads: “The current mortgage market model in the UK, based on mortgagors regularly refinancing 2- or 5-year fixed-rate deals, suits both the major mortgage lenders and mortgage brokers.” It suggests that neither of these groups is keen on long-term fixed mortgages.
The institute calls for reforms in regulations around mortgage advice, including curbing excessive ‘churning’ of investments and clarifying that recommending a long-term fixed rate mortgage would not be viewed as mis-selling.
It also argues that long-term fixed rate mortgages would be beneficial for first-time buyers and urges for changes in the Bank of England’s loan-to-income flow limit to enable these borrowers to avail such products.
Finally, the institute proposes a reform in Solvency II regulations to attract life insurers into the mortgage lending market. It suggests that such a move could enable insurers to fund long-term fixed-rate mortgages, thereby increasing their availability.
The institute concludes: “But with slow wage growth and interest rates now on the rise, this is the time to increase the availability of long-term fixed-rate mortgages… in the longer term, we need to reform Britain’s mortgage market to reduce interest-rate risk for homeowners and, in so doing, boost home ownership.”
