At the Conservative Party conference in October 2020, Prime Minister Boris Johnson gave a typically rousing speech. He talked about rebuilding better, leveling out and other buzzwords that more or less translated into government policy over the next 12 months.
Much of that talk, however, was devoted to a commitment that at first glance went nowhere: to lengthen the traditional fixed-rate mortgage market from two or three years to 20 or 30 years. This policy could create an additional 2 million homeowners, the biggest expansion in homeownership since the 1980s, âhe enthused.
Given today’s rising expectations that the Bank of England will hike policy rates in an attempt to calm inflation, the idea seems timely.
In other global economies, long-term fixed-rate home loans are the norm: borrowers typically take money for decades and fix the interest rate in advance for the term. Citigroup, for example, is currently offering US borrowers a 30-year contract set at 3.125%. A French borrower could get a 15-year loan from BNP Paribas for as little as 1.05%. In the UK there are a lot of cheap deals out there, but it’s practically impossible to lock in for the full term of a 25 or 30 year mortgage.
The tradition of short-term deals in the UK has something to do with how UK markets tend to operate in everything from energy supply to car insurance: fierce competition and a ‘ churn âfrequent.
In the mortgage industry, the UK’s penchant for short-term transactions is also a product of its underlying funding structure: most home loans are funded by deposits, most of which can, in theory, be funded. less, be withdrawn at any time. The longer the fixed-rate term for which a bank lends, the more it will have to rely on potentially expensive derivatives to structure it.
In the United States, that free-market cheerleader, the mortgage industry only works the way it does because of a long tradition of federal support through backers Fannie Mae and Freddie Mac.
But Johnson is determined to act. The post-war tradition of owner occupation has fallen from over 73 percent in 2008 to barely 65 percent today, as a growing part of the UK’s population is seen as too risky to be granted. a mortgage loan. Among those under 40, the rate rose from 67% 20 years ago to 38%, as Graham Edwards pointed out in an influential research paper for the Center for Policy Studies published before Johnson’s 2020 speech. This produced 3.57 million “resentful tenants,” he estimated.
The buy-for-hire boom (driven in part by past Tory policies) was in part to blame, Edwards said. The same is true of the regulatory protections put in place following the 2008 crisis. âTackling the property crisis is arguably the government’s most important national challenge – economically, socially and electorally,â he said. he concluded. Is it possible ?
The established lenders who dominate the market have barely jumped on it. There has been a slight increase in mortgage repairs. According to Financial Times calculations, based on Nationwide market data, the average fixation period has fallen from around 2.4 years to around 3.6 years over the past decade.
There are signs that non-banks may be more inclined to take up the challenge in the long term. M&G, the asset manager, recently launched 20-year mortgages in Ireland, traditionally similar to the UK in its mortgage structures. Rothesay, a pension insurer, is also set to join the market, according to people close to the company.
Long fixed rate transactions circumvent one of the regulatory restrictions on short term fixed rates, introduced as a prudential measure after 2008: namely that a stress test should be applied in most cases to ensure that a borrower could afford a 3 percentage point increase in interest. If the rate never increases, no stress test is necessary. Some reformers advocate relaxing other regulatory safeguards.
There are still some snags. First, long-term rates will be more expensive, if not prohibitive. Habito, an intermediary which already offers a rare contract over 30 years, the price up to 4.74%. The cheapest two-year patches cost less than 1%.
Second, it would be a strange time to sanction the relaxation of standards. UK house prices in much of the country are in a bubble that may well be burst by rising inflation and interest rates. The 1980s, as Johnson pointed out, produced a record-breaking expansion in homeownership. But by the end of the decade, the market had collapsed, leaving a lot of negative equity.