Snap Out Of It, Mr Shapps!
24th October 2011
When I read that Mr Shapps, who I actually like, had made a speech within which he called for 30 year fixed rate mortgages I must admit my shoulders sagged a touch.
My first reaction was if that was the best idea he can come up with then we are all up the proverbial creek without a you know what. In reverting back to an oft tried and never achieved call for 30 year mortgages we suddenly saw that actually, no one in power at least, seems to really get the issues.
Alastair Darling said much the same thing in 2007 and was duly obliged by a couple of lenders offering 25 year fixes at the 6.39% level. Of course there was not much take up due to the onerous penalties in the first 10 years and the additional cost, but for those that did, well it’s looking a tad expensive now.
But still, Grant Shapps said to the Building Societies Association that “Longer-term mortgages – possibly as long as 30 years – could help families on tight budgets know exactly where they stand when they are buying a home, by giving them greater certainty over how much they will be paying for their home in years to come.”
As with any advice, the problem is that for most real clients, a 30 year fix is probably not the best advice. Budgeting is all very well, but as those tied in to the previous offerings will no doubt tell you, it sometimes isn’t all it’s cracked up to be.
In today’s ever-changing times with a transient work-force, births, divorces and the like, some kind of flexibility is required and having a long-term fix with expensive tie-ins means that those who are looking to move are tied to the lender they took the product with. This may not be the best lender when they need to move or borrow more.
Mr Shapps also suggested that to get over the redemption penalty issue, lenders should cost them in to the interest rate. Ok in theory, but in practice this just makes the differential more expensive. Just a quick glance at 10 year fixes available at present, (and there are only 4 lenders I can see offering 7 such products), there is only one Skipton, who offers this at 85% LTV at a rate of 5.85%. Penalties are a massive 6% in the first 5 years.
The challenge for lenders, as always, would be to produce a cost-effective very long term fixed rate, with flexibility built in. Then you may see demand for such products rise, although not by a great deal.
So when you actually sit in front of a client and explain the pros and cons then go through the cost differentials, the majority, although not all, will opt for a cheaper and less onerous 5 year product.
My final question is what exactly, by calling for the introduction of such products, does Mr Shapps hope to actually achieve? It will not cure the issues we have in the property markets; it will not mean more homes are being built; it will not help a workforce that may need to move to where the jobs are and it most definitely help increase flexibility to deal with whatever life throws at you.
If anything it could stagnate the market further and mean that those who are on a tight budget end up paying more than they actually need to.
Whilst a healthy market undoubtedly needs a good mix of products to cater for every aspect of personal choice, there are surely more important matters to be concentrating on. Overhauling Stamp Duty, for example, would be a much better place to start.
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Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.