Long-term fixed rate mortgages are key to making home ownership more viable for first-time buyers, but fears over future misselling claims may be preventing brokers from recommending them, an economist has claimed.
Speaking at the Westminster Social Policy Forum’s seminar on housing strategy today, James Browne, an economic policy adviser at the Tony Blair Institute for Global Change argued that long-term fixed rates could help buyers overcome affordability hurdles.
He said that one problem with the UK’s current propensity to offer two and five-year mortgage deals is that buyers often struggle to pass stress tests which are based on how far the SVR could rise in the future.
Browne said: “These days, there’s a stress test as part of the application, so [borrowers] have to show not only that they can afford the initial monthly repayments, but they could also afford higher repayments on the standard variable rate that they’ll revert to after the end of their two or five year fixed term.
“That means that people can be turned down for a mortgage even though the initial payment would be less than the rent that they are currently paying.
“Other countries have much greater use of long term fixed rate mortgages that avoid the risk that repayments will rise to an unaffordable level, and that enables first time buyers to borrow more without increasing risks.
“At the moment, we have a few smaller providers coming into the market in the UK that offer these mortgages, but they’re hamstrung by policies that restrict the amount of lending they can do at high loan-to-income ratios.”
But Browne said that long-term fixed rates on lenders’ books should not be counted as part of the 15% quota of high loan-to-income mortgages they are allowed to hold – since those borrowers are protected from interest rates escalating beyond their affordability.
He also believes that advisers should be protected against claims of misselling if interest rates fall and it turns out the borrower could have saved money by opting for a series of shorter-term deals.
He said: “We also think that advisers […] should be allowed to advise people to take the long-term fixed rates without the risk of the accused of misselling should interest rates later fall.
“Regulators should clarify that it wouldn’t be misselling to recommend a long-term fixed rate in that case and also allow advisers to recommend long term fixes if that’s the only way people can get into home ownership.”
