Why do we fix for 2-5 years in the UK while in Europe they fix for much longer without penalties?

SouthLondonUser

I understand that fixing the rate of a mortgage for longer has a cost for lenders, that if the borrower prepays that's yet another cost and that's why UK mortgage lenders apply early repayment charges.

However, what I do not understand is why in other countries borrowers can fix for much longer (10-20-30 years), either without or with much smaller prepayment penalties.

The US have Fannie Mae and Freddie Mac - but Europe does not.

It is not just about the currency: Ireland has the Euro but follows the British model of fixing for only 2 or 5 years.

Is it that in these countries (Italy, Germany, France, Spain) there are explicit laws either banning or capping early repayment charges?

The UK mortgage market is broker-driven, and brokers have an incentive in getting borrowers to refinance as often as possible. But still this doesn't explain the whole story.

housebuyer143

I personally like it. Why do you want to fix for 20 years? Too much fluctuations in rates in that time that could mean you paying much more than you should be. 
Remortgaging isn't really hard so I don't see the big issue. 

Brokers don't really have an inventive to force people into the lowest term, most recommend longer when it's in the buyers interest. 

silvercar

I've done an 8 year fix (1998-2005) followed by a 5 yr fix (2005-2010) precisely to avoid the costs of remortgaging arrangement fees, legal fees, valuations etc

It turned out that the 5 yr fix had a + life time tracker at 0.75% above base rate attached to it, so I've been on that ever since. It was a period of very low interest rates so I've never seen anything worth enticing me away. 

SouthLondonUser

penners324 said:

 long term mortgages tend to have higher interest rates than short term mortgages 

But the real question is: why is it like this in the UK and Ireland, but not in most of continental Europe?

It cannot only be the cost of financing itself for a bank in a given currency: Ireland has the euro yet follows the British model.

So why do UK and Irish lenders charge such different rates for shorter vs longer mortgages?

And why do UK and Irish lenders charge such punitive rates for early repayments vs their continental peers?

Is it that national legislation forbids high early repayment charges? If it were a EU thing Ireland wouldn't have them.

As for why someone might want longer fixes without punitive prepayment charges, it is quite obvious: it's about having certainty for longer periods, without being in a situation where a life change (death, divorce, having to move elsewhere) forces you to pay punitive early repayment charges. Portability isn't always a solution - eg a couple splits and must sell the house.

ACG

Historically, 2 year fixed rates have been cheaper than 3 year fixes which in turn are cheaper than 5 year and then 10 year fixed rates. 

This forum alone is a good indication, how many times do we see people saying they secured a rate of x% (despite it coming with a high fee)? People are generally driven by the lower rates. 

We are doing more 2 year variable and 5 year fixed rates this year than we have done in the last decade, why? because they are cheaper and in the 5 year case offer more security than the 2 year fixed rates. Price dictates a lot. If a lender releases a product and demand is not there, they have wasted their time designing the product due to lack of take up its a waste of money. 

I think in addition to that, due to the way the housing is in this country people typically do not stay in a home for 10-20 years. You might have your starter home, then a family home, then a bigger family home etc. I look at my grandparents, they lived in a static home for about 12-18 months when they got together and then they bought a house which they lived in from their early 20s until they passed away/went into care in their mid/late 80s. That just does not happen now. 

In summary as I seem to have waffled on... Price and flexibility I imagine. 

SusieT

I have been looking at buying in Germany, and the mortgage conditions I have seen all have early repayment charges if you repay more than 10% of the balance each year, some only allow 1 or 2 overpayments a year rather than some in UK allowing drip feed payments. They can however be fixed for 10 years plus as a normal contract term. Possibly because in Germany at least there is a tax if you sell the property within 10 years (without buying a replacement) of about 40% on the increase in value.