Michael Gove’s Canada-style 25-year mortgage plan won’t fix the current crisis

Borrowers have always preferred shorter deals, says James Moore

Nationwide has a highly competitive 10-year fix but consumers have proved reluctant (Getty)

Is there a solution to the mortgage crisis that doesn’t involve billions of pounds worth of taxpayers’ cash?

Amid mounting pressure on Rishi Sunak, Michael Gove has popped up with the suggestion that 25-year fixed rate home loans could work, citing their popularity in “countries like Canada”.

It sounds like a good idea; if rates are fixed throughout the entire term of a mortgage, there would be no crises created by fluctuating interest rates, which are an inevitable part of the economic cycle.

But anyone who has been around finance will have got an immediate sense of deja vu. Just about every time there is a mortgage crisis, someone pops up and makes the same suggestion. Gove’s “Canadian” loans are no more a new idea than the internal combustion engine.

So have they been tried? Up to a point. The problem is the market; borrowers have simply never latched on to these products because there aren’t many available and the prices don’t tend to be very attractive.

Specialist lender Kensington, for example, offers a mortgage fixed for the entire term; its website shows that for an 85 per cent loan-to-value deal over 25 years, you’ll pay 6.05 per cent with a £1,499 arrangement fee, or 6.21 per cent with no fee. For those who can muster a deposit of 25 per cent, the deal gets more attractive: 5.83 per cent with the arrangement fee or 6 per cent without it.

Trouble is, most borrowers would still prefer to take a slightly higher rate for a couple of years and hope to remortgage with something better when the time comes, even if the era of near-zero rates is probably over.

The Nationwide Building Society has a highly competitive fix for 10 years, with a rate of 5.6 per cent without an arrangement fee on a 90 per cent loan on a £250,000 property. Such a deal might be appealing given that the latest average two-year fix, per Moneyfacts, has increased to 6.07 per cent, while it is 5.72 per cent for a five-year deal.

However, despite the attractive rate (by today’s standards) Nationwide says interest is still limited. “Historically, take-up of 25-year fixed mortgages has been low, with borrowers preferring the flexibility of shorter-term deals of two to five years,” says a spokesperson. “Uptake of the society’s 10-year fixed rate deals remains low, particularly at a time when rates are comparatively high and people have an expectation that they may fall in future.

“However, longer-term fixed rates do allow people to potentially borrow more, as a lower stress rate is applied and it provides payment certainty for a longer period. For this reason, our Helping Hand proposition lends more to first-time buyers taking a five or 10-year fixed rate.”

Broker John Charcol says the market for longer-term fixes has become more competitive, tempting some consumers. “As we head into a period of average five year or less fixed rates starting with a 5 per cent or 6 per cent rate, this makes longer-term fixed rates considerably more desirable,” says mortgage technical manager Nicholas Mendes.

“As we see new lenders coming into the market such as Perenna, and other fintech lenders with new funding models and longer-term fixed rates, this will no doubt disrupt the traditional lenders product offering.”

So, change could be coming – a welcome development because these longer-term fixed deals provide borrowers with budgetary certainty for the price of some flexibility. But while Gove’s idea of a maple-leaf mortgage revolution could help in future, it won’t fix the current problem the nation is facing.

Government aid for borrowers has so far been ruled out; it would be expensive, unfair to renters, and difficult to means test. Ministers also want to get out of the habit of dipping into taxpayers’ cash to fund a bailout every time there is a crisis. It can also be argued that borrowers must accept that there is a price for riding the interest rate cycle; sometimes the market will move against you.

But nobody wants to see a mass of repossessions, which could spread some very dangerous fallout across the economy.

Most agree that the solution is with lenders and how they treat distressed borrowers. Ele Clark, senior money editor for consumer group Which?, said: “The Financial Conduct Authority (FCA) previously wrote to banks to remind them of their obligations to serve customers, especially those experiencing financial difficulties, and the regulator must continue to monitor this to ensure firms are offering support that is tailored to individual customers’ needs.”

Tools available to lenders include the offer of payment holidays, forbearance, or extending the loan term. Clark urges borrowers to “speak to their lender” – a cry that is often heard. It can be very much to the borrower’s advantage; doing so early means the borrower can lock in a deal but switch to a cheaper price if rates improve before it comes into force.

Nationwide agrees. “We recognise the current higher interest rate environment and wider cost of living pressures are making things difficult for many of our members,” it says. “We’d encourage them to speak to us if they have any concerns about making their payments – just speaking to us will have no impact on their credit file.

“Nationwide has a range of options to support customers with mortgage payments, including the ability to extend mortgage term, and we believe lenders offering support should be the first option. We are in regular contact with government on the issue and would be happy to work with them on any future proposals.”

But not every lender is so helpful, and the role of the FCA will be critical. It hasn’t excelled itself in the past; like lenders, it needs to get this one right.