30-Year Fixed Mortgages May Be Coming to the UK

(Bloomberg) -- The UK government will explore ways to hand borrowers larger and longer mortgages in the hopes of encouraging more people to buy homes, with a review to be launched in the next few weeks.

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The joint review by the Treasury and the Department for Levelling Up, Housing and Communities will consider 30-year fixed rate mortgages, debts worth almost 100% of the property and ways to blend renting and owning a property, according to people familiar with the matter.

Downing Street is considering candidates to lead the work, with senior banking and insurance figures being considered. Graham Edwards, a property and think-tank veteran who has called for long-term fixed mortgages as a way to shepherd two million renters into home ownership, is one contender, the people said, who asked not to be identified discussing private matters.

The proposals under review highlight the UK government’s emphasis on finance rather than building to fix the UK’s shortage of suitable homes. Construction of new properties is yet to reach the government’s manifesto pledge of 300,000 per year, hindered partly by shutdowns during the pandemic.

Prices in the UK property market have defied the wider economic headwinds as well as curbs on risky lending and supply since the financial crisis. Average prices grew 11.2% annually to £269,914 ($327,000) in May -- putting ownership further beyond the reach of many Britons who must find high deposits and meet price-to-income limits.

“We will undertake the first comprehensive review of the mortgage market for a decade, to boost access to finance for first time buyers including low-cost, low-deposit mortgages,” said the DLUHC in an emailed statement. “The review will deliver recommendations in autumn 2022 and will be supported by officials from HM Treasury.”

The review will attempt to add substance to Prime Minister Boris Johnson’s speech last week that promised a “home ownership revolution.”

Johnson’s Conservative government has turned to housing as one way to reboot its policy goals after the prime minister survived a vote of no confidence. In his speech, Johnson pledged to build on Margaret Thatcher’s totemic 1980s “right to buy” policy by enabling housing association tenants to buy their properties cheaply, possibly funded by state benefits. Opposition politicians have said the idea could deplete housing stock and burden buyers at a time of heightened economic strain.

More Guarantees

The terms of reference for the review will be announced shortly. They are expected to include consideration of ways to create mortgages worth about 98% of the value of a property, potentially by offering a state guarantee or creating commercial insurance products for the riskiest slice of the loan, according to the people. The move would follow 95% mortgages that were announced in 2021 with a state guarantee to boost demand after the pandemic.

Edwards, who co-founded property investment company Telereal Trillium, has advocated for introducing decades-long fixed rate mortgages to the UK as a way to turn renters into home buyers. Currently, home loans in the UK are typically fixed for two or five years.

Edwards’ ideas have gained traction with some bankers and also members of the Conservative Party as a possible vote winner at the next general election.

Introducing longer loans could be difficult in the UK unless the government is prepared to create state-backed entities. In the US, Fannie Mae and Freddie Mac help shoulder interest-rate risk.

At Scale

One idea expected to be explored is whether the 30- or 40-year mortgages could be parceled up into packages that life insurance firms could buy at scale to earn a return, thereby avoiding huge new state intervention.

A key question for the reviewers will be whether they can consider regulatory changes to help banks increase the amount they lend to riskier customers. Under Bank of England rules imposed after the financial crisis, banks cannot lend more than 15% of their total mortgage book to borrowers looking for more than 4.5 times their annual salary.

Bank executives would like the cap to be lifted to 20%. But, according to one person involved in the preparation for the review, regulatory change is not expected to be up for discussion. Another idea could be more savings products with tax breaks.

“The root of the problem is that the UK is an outlier internationally in lacking mechanisms to manage the risks associated with lending to first-time buyers,” said Ian Mulheirn, chief economist at Tony Blair Institute for Global Change and author of a recent report on housing reform. “Remedying that will involve a range of interventions, from introducing a mandatory mortgage insurance system to removing the many barriers to long-term fixed rate products.”

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