As many people will be aware, the standard length of a mortgage term in this country is 25 years. However if the latest headlines are to be believed, this ‘standard’ could soon be changing. The Bank of England is said to be thinking about extending the term to 30 years, and turning it into a fixed rate deal as well.
Could this change the way we look at mortgages?
It could. The Bank of England is considering whether the country could avoid a future housing bubble, something some experts are concerned could happen again. The housing market has been seen to improve recently and there are worries a new bubble could occur, with potentially devastating effects on the economy.
By increasing the average mortgage term by 5 years it is thought the risk of rising interest rates could be avoided. By paying a fixed rate mortgage over that term, homeowners will always know exactly what their monthly payments will be. This in turn will enable them to plan ahead with more confidence financially.
A significantly lower risk
This is the attraction of the 30 year fixed rate mortgage. Let’s suppose you were to take out such a mortgage now – one you knew you could afford to pay back each month. The current interest rates are historically low, and without a long term fixed rate you would be unsure as to whether you could afford to continue paying your mortgage if rates were to rise.
However, with the rate fixed ahead of agreeing to your mortgage, you would be secure in knowing exactly what you would pay back monthly for a long time to come. This means that even if interest rates were to rise significantly in a few years time, you would not be in for any nasty shocks concerning your monthly payment. Thus, fewer people would struggle and go into arrears, and the housing market would remain relatively stable even if interest rates were to soar.
A shift in what we regard as normal
It is likely also that mortgage terms could become even longer, rising as high as 40 years in length in some cases. Some people in the government think mortgages could be taken out with a view to passing the house and the mortgage on to offspring once the time comes. Furthermore with people working for longer until they are able to retire, it also means there will be more years available to make mortgage payments for.
Nothing is certain at the moment, but these plans and ideas certainly provide food for thought. Fixed rate mortgages for two, three or five years may be commonplace at the moment. However, if these ideas come to fruition we may soon be looking for mortgages with much longer fixed rate terms attached to them. It could transform the UK housing market altogether and enable many more people to afford to plan ahead when it comes to looking for a mortgage and buying a home.