At the Conservative party conference in October 2020, prime minister Boris Johnson gave a characteristically rousing speech. He talked about building back better, levelling up and other buzz phrases that have more or less been translated into government policy in the intervening 12 months.
One large chunk of that speech, though, was devoted to a pledge that, on the face of it, has gone nowhere: to lengthen the traditional fixed-rate mortgage market from two or three years to 20 or 30. “We believe that this policy could create 2m more owner-occupiers, the biggest expansion of home ownership since the 1980s,” he enthused.
Given today’s rapidly mounting expectations that the Bank of England will raise base rates in a bid to calm inflation, the idea feels timely.
In other global economies long-term fixed-rate home loans are the norm: borrowers typically take money for several decades and set the interest rate for the duration in advance. Citigroup, for example, currently offers US borrowers a 30-year deal fixed at 3.125 per cent. A French borrower could get a 15-year loan from BNP Paribas for as little as 1.05 per cent. In the UK, there are plenty of cheap deals, but it is virtually impossible to lock in for the whole length of a 25- or 30-year home loan.
The tradition of short-term deals in the UK has something to do with the way British markets tend to work in everything from energy supply to car insurance: stiff competition and frequent “churn”.
In the mortgage industry, the UK’s fondness for short-term deals is also a product of its underlying financing structure: most home loans are funded by deposits, the bulk of which can, in theory at least, be withdrawn at any time. The longer the fixed-rate term a bank lends for, the more it will need to rely on potentially expensive derivatives to structure it.
In the US, that cheerleader of free markets, the mortgage sector only functions as it does thanks to a long tradition of federal support through funding providers Fannie Mae and Freddie Mac.
But Johnson is determined to act. The postwar tradition of owner occupation has declined from more than 73 per cent in 2008 to barely 65 per cent now, as a growing chunk of the UK population is deemed too risky to be granted a mortgage. Among under-40s, the rate has collapsed from 67 per cent 20 years ago to 38 per cent, as Graham Edwards pointed out in an influential research paper for the Centre for Policy Studies published before Johnson’s 2020 speech. That has produced 3.57m “resentful renters”, he estimated.
The buy-to-let boom (driven in part by past Tory policies) was partly to blame, Edwards said. So were the regulatory protections implemented following the 2008 crisis. “Tackling the ownership crisis is arguably the government’s most important domestic challenge — economically, socially and electorally,” he concluded. Can it be done?
The established lenders that dominate the market have hardly jumped to it. There has been a slight lengthening of mortgage fixes. According to Financial Times calculations, based on Nationwide market data, the average fixing period has gone from about 2.4 years to about 3.6 years over the past decade.
There are signs that non-banks may be keener to take up the long-fix challenge. M&G, the asset manager, recently launched 20-year mortgages in Ireland, traditionally similar to the UK in its mortgage structures. Rothesay, a pensions insurer, is also poised to join the market, according to people familiar with the company.
Long fixed-rate deals get around one of the regulatory restrictions on short-term fixes, introduced as a prudential measure post-2008: namely that a stress test must be applied in most cases to ensure a borrower could afford a 3 percentage point increase in interest. If the rate will never rise, no stress test is necessary. Some reformers advocate loosening other regulatory safeguards.
There are snags, though. First, longer-term rates will be more expensive, perhaps prohibitively so. Habito, an intermediary that already offers a rare 30-year deal, prices it at up to 4.74 per cent. The cheapest two-year fixes cost less than 1 per cent.
Second, it would be an odd time to sanction the loosening of standards. UK house prices in much of the country are in a bubble that could well be punctured by rising inflation and interest rates. The 1980s, as Johnson evoked, produced a record expansion of home ownership. But by the end of the decade the market had crashed, leaving many in negative equity.