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MSE News: Is the Government's 30-yr fixed mortgage call baloney?

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MSE News: Is the Government's 30-yr fixed mortgage call baloney?

edited 30 November -1 at 1:00AM in Mortgages & Endowments
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MSE_GuyMSE_Guy MSE Staff
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edited 30 November -1 at 1:00AM in Mortgages & Endowments
This is the discussion thread for the following MSE News Story:

"The Housing Minister recently called for more 30-year fixed mortgages. One broker says they should not be ruled out ..."
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  • larkimlarkim Forumite
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    Fully agree with the article, but I can't see full term fixes become popular in the UK as it would require a whole market adjustment to the new world order.

    The current mortgage industry is predicated on making money as people switch around, either through up front fees or through increased marginal profit rates when individuals fall back onto SVR after "deals" have run out. Some of this has driven the market to offer very good value mortgages which discerning (and flexible) individuals can take advantage of, and the flip side is that individuals who cannot make leaps around providers can be disadvantaged.

    Personally, I would love the market to change so that the only time that I have to think about mortgage rates is when I buy the house and then I'm fixed for the next 25 years. In the long run, if I can afford something today and I don't expect to retire in the next 25 years, then I am likely to find the mortgage more and more affordable throughout the term. Having to maintain complex reviews including arrangement fees, lost investment income, mortgage review dates etc is a complete pain in the rear; much easier back in the days that my parents experienced when you took out a mortgage once and then were done with it, even if you did have the opportunity to switch.

    Matt
  • michaelsmichaels Forumite
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    Aren't US 'Fixes' much more flexible than the UK equivalent with basically no early repayment penalties so you can repay if you stop owning or refix if long rates fall so a very different proposition to what has ever been offered in the UK?
    I think....
  • Stuart_WStuart_W Forumite
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    Our 10-year fixed rate mortgage began in 2006.

    The financial climate since then has been up and down, and down some more, but our mortgage has been oblivious to all this, our minimum monthly repayment has always been the same. Stable, secure, nothing can change it until 2016. The concept of "winning" or "losing" with a mortgage suggests that finding a home is like gambling. It shouldn't be. Will we have "won" or "lost" taking a 10 year fix in 2006? To be honest, it will probably end up being a pretty close call, but that isn't the point. How does whether we got a better or worse deal than Mr & Mrs Jones impact on our ability to repay our mortgage? It doesn't. Our £601 every month is still going to be £601 every month, whether Mr Jones and his wife have to pay £500 or £700 instead because they are on a different deal. If interest rates shoot up, will we feel "in the money" because it won't affect us? No. Will we feel unfairly penalised if Mr Jones is paying £100 a month less than us because he's on a lower rate? No. We know what we will pay and can plan accordingly.

    Overpaying each month has already cut our mortgage in half as it is, so we're probably going to have nothing left at the end of the 10 year fix. But being able to fix our minimum repayment commitments has been something we wouldn't have wanted to have done without.

    If a longer fix had been available we would have probably considered that, too.
  • Stuart_WStuart_W Forumite
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    It was interesting to read in the article
    Clearly the two things to avoid are fixing your mortgage only to see variable rates slip below the level you have fixed (as happened to many in the noughties) or taking a variable option only to see that variable rates rise above the fixed rate that you could have had.

    Well, as interest rates are variable, there is absolutely no way to be sure of avoiding either of those things from happening. Anyone that promises they can is talking rubbish. It is a choice between certainty in what you will need to pay back each month and uncertainty of what you might need to pay back each month. Whether you "win" or "lose" depends what game you're playing. I'm aiming for being able to provide a secure home for my family. Best of wishes to everyone else, but whether you "win" or "lose" at whatever game you're playing with your mortgage, it won't affect me.
  • edited 18 November 2011 at 6:18PM
    JezRJezR Forumite
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    edited 18 November 2011 at 6:18PM
    Full-term fixed rate mortgages used to be available at one time in the UK, albeit uncommon. My aunt took out a 25-year fixed-rate loan at 6.5% from an insurance company in 1968, paying a 'premium' of 0.25% over the variable rate of the time, although I think there was some life cover included in that. People told her she was mad, but her rationale was that she would know exactly what she had to pay each month until the loan was paid off. Of course it worked out spectacularly well in her case.
  • edited 18 November 2011 at 6:27PM
    VT82VT82 Forumite
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    edited 18 November 2011 at 6:27PM
    The article talks about whether or not they would be good for the customer, but makes no mention of whether or not banks would want to offer them. Well, I'm fairly sure they wouldn't.

    Offering long term fixed rate mortgages is risky for banks, because they are not going to get people lending to THEM at a fixed rate for 30 years. So if they have long term fixed mortgages, but shorter term funding costs go up, they will lose money by having the interest income on their assets being fixed. In theory they can hedge the risk with swaps, so that they convert the fixed mortgage payments into a series of payments that track the market rate. But then what happens if the borrower overpays? Or wants to redeem? Or defaults?

    If they hedge the mortgage with a swap but then need to break this agreement, the cost to them could be extortionate for long term swaps, where even small movements in rates can massively affect the cost of breaking them. This is because the swap counterparty won’t want the bank to cancel the swap if rates have gone down, and will charge them dearly for the loss income they would be expecting as a result of having the swap being broken.

    So then we are left with who takes the risk on this?

    Option 1 is the borrower – there is the reality that the true cost of breaking could mean a 30% early repayment charge. However the FSA has said that ERC’s can’t be above a certain level, even if the true cost is higher, and they can’t be calculated based on the true cost at the time – they have to be set in stone up front.

    Option 2 is the bank – they could do all the analysis they like to try and work out prepayment levels, and hedge the remaining risk with exotic swaps with options, but there is no point when the cost would be prohibitive compared to offering the mortgages they do now.

    Option 3 is an investor – the bank could package up the mortgage and sell it on via securitisation. It is then the investor taking the prepayment risk. However, it is very unlikely that the bank would be able to find an investor willing to take on both the credit risk and the prepayment risk of the fixed rate mortgages.

    The only reason the system works in the States is because the mortgages are packaged up and bought by investors willing to take on the prepayment risk, but only because the Government guarantees the credit risk through Fannie Mae and Freddie Mac.

    As the government here has no interest in guaranteeing mortgages after the spectacular failure of Fannie Mae and Freddie Mac in the US, the system will never get off the ground.
  • grumblergrumbler Forumite
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    So you must ask yourself what you think is going to happen to long term interest rates. If you don't really know you should discuss the balance of probability as to whether rates will rise with your adviser.
    ...There are five principal considerations:
    1. ...
    2. ...
    3. ...
    4. Do you think variable rates will go up or down from where they are now? If up, do you think they will go up by more than the extra cost of the fixed rate now? For how long? Do the maths or get your adviser to do it for you.
    5. ...
    Think? Maths? Advisor?
    Am I on my own or with help of some "advisor" supposed to beat the financial experts working for banks and forecasting the interest rates in the future? In all honesty, this makes no sense to me and is a pure gambling.

    Other points like affordability, stability of income and peace of mind do make sense.
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  • PincherPincher
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    Ultra-slim BOE trackers are causing lenders extreme discomfort, and some of them have wriggled out of SVR guarantees to stay alive.
    The property market is partially frozen because people don't want to lose their cheap tracker, so they can't sell.

    Let's say lenders do a 5% 30 year fix, because that's long term average, so it should be OK. We then get a long term population explosion, causing greater and greater demand on fuel, food, water and living space. This translates into 7% annual inflation, which makes BOE averge at 10% for five years from 2015 to 2020.

    Yet again, no one will sell, for fear of losing their 5% mortgage.
    Yet again, the lenders are caught off guard, and will either welsh on the fix rate, or seek government bail-out.

    In this scenario, civil order will have broken down by 2019, so you wouldn't bother to pay the mortgage any more, so the rest of the fix is irrelevant.

    So, I'm saying, don't bother with a 30 year fix. I would like a 10 year fix at 3%, though.
  • If you were to have a 30 year fixed term mortgage then there would be no chance to overpay the mortgage due to the early repayment charge automatically kicking in if you knock just one month off. Also you would pay the early repayment charge if you were to move house at any point in the 30 years. Correct me if i'm wrong about either of those points, anyone.

    30 years is a long long time to be locked into a mortgage.
  • Why the hell 30 years?

    If anything they should be encouraging shorter mortgage terms.
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