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Would a European mortgage model offer better protection for homeowners?

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As interest rates climb, many homeowners are facing higher mortgage repayments. Now, an MP is arguing that moving to a European mortgage model would relieve some of the challenges. Read on to find out why.

In a bid to tackle high inflation, the Bank of England has increased its base interest rate. At the start of 2022, the base rate was just 0.25%. As of July 2023, it stood at 5%.

The base rate has a direct effect on the cost of borrowing. As your mortgage could be one of your largest outgoings, rate rises may have a significant effect on your budget.

According to the Centre for Economics and Business Research (CEBR), homeowners with a mortgage deal that expires in 2023 will, on average, see costs rise by £3,900 a year. The organisation predicts the pressure on household budgets will lead to nearly 10,000 additional home repossessions over the next three years.

While many economies are also experiencing high inflation and rising interest rates, it’s not having the same effect on mortgage repayments in some countries.

The UK mortgage market is “broken”, says SNP MP

Differences in how mortgages work in some European countries mean that homeowners have been shielded from the recent interest rate rises.

SNP MP Ian Blackford recently argued that if the UK adopted a European mortgage model, homeowners would have greater protection. According to the National, he added the UK mortgage market is “broken” and has left UK mortgage holders “uniquely exposed to economic shocks”.

So, what would adopting a European model mean?

1. Longer mortgage deals with fixed interest rates

In the UK, fixed-rate mortgage deals often last for two, three, or five years. Once a deal ends, you may need to remortgage to secure a competitive interest rate.

Meanwhile, in some other European countries, mortgage deals last far longer and are more likely than the UK to have a fixed interest rate.

For example, 92% of mortgages in Belgium are fixed-rate deals that last for more than 10 years. Similarly, more than half of mortgage deals in Spain and Denmark provide a fixed rate for at least a decade.

A longer mortgage term with a fixed interest rate can provide some security for homeowners. With a fixed-rate deal, the interest rate you pay will not change during the term, so you are protected from interest rate rises. Long fixed-rate deals mean fewer homeowners would face unexpected increases in their outgoings.  

In addition, longer terms may mean you won’t need to remortgage as frequently. This could reduce other costs, such as mortgage arrangement fees.

Of course, if interest rates fell, a longer term mortgage deal could potentially mean you have to wait before you benefit from it.

While longer mortgage deals aren’t as common in the UK, some providers do offer them. If a longer mortgage deal could provide you with peace of mind, focusing on these lenders may be right for you.

2. Potentially lower interest rates overall

Some European economies use covered bond markets to finance long-term fixed-rate deals. A covered bond is a type of debt security issued against a bank or another organisation that lends money. This means interest rate risk is placed on investors, rather than households.

As a result, some mortgage holders across Europe may benefit from a lower interest rate overall. In turn, this can make home ownership more affordable.

While you can’t change how the mortgage market is financed in the UK, there may be things you can do to access a more competitive interest rate, including:

  • Shopping around to find a deal that suits you: The interest rates lenders offer may be very different. Taking some time to research your options and understand how they could affect mortgage repayments could be valuable. A mortgage broker can provide you with professional help when you’re trying to secure a new mortgage deal, including comparing different lenders with your circumstances in mind.

  • Improving your credit score: Lenders use your credit score to assess how much risk you pose to them. Generally, lenders will offer their lowest interest rates to those they consider less risky. So, reviewing your credit report to remove mistakes and fix potential red flags could be worthwhile.

  • Lowering your loan-to-value (LTV) ratio: Your LTV compares your outstanding mortgage debt to the value of your home. Usually, the lower your LTV, the more competitive the interest rate a lender will offer you. If you can, paying a lump sum off your mortgage to move into a lower LTV band could save you money overall.

Contact us to talk about your mortgage needs

Finding the right mortgage deal for you can be challenging. There are a lot of providers to consider and you’ll need to decide which type of mortgage makes sense for your circumstances. A mortgage broker can assist you throughout the mortgage process, from searching the market to completing your application.

If you want to talk about your mortgage needs, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Would a European mortgage model offer better protection for homeowners?

Approved by The Openwork Partnership on 07/08/2023.