50-year fixed-rate mortgages coming to the UK: will they work?

It can often be difficult for many of us to think financially in five years, but a new lender can offer borrowers the opportunity to fix their mortgages for 50 years.

New lender Perenna has been granted a license to offer a 50-year fixed-rate mortgage in the UK, meaning people could secure their home loan until 2072.

The idea is somewhat novel in a market where two to five year fixed rates are the norm.

The new norm? Longer-term mortgage products could become more common despite the UK market being dominated by two to five year deals.

But Perenna may not be alone for long. Chris Sykes, technical director of mortgage company Private Finance, says there are rumors in the market that more lenders are coming out with a similar product.

“I’ve heard of others looking to launch these products, fixed for the very long term, even before this news,” so there might be a few others in the pipeline in the medium term, he says.

Ultra-long products are not completely unknown. Lender Kensington Mortgages, which specializes in lending to people with bad credit, offers a fixed product with terms ranging from 11 to 40 years, while online lender and broker Habito has a similar deal.

In July, the government reportedly considered encouraging 50-year mortgages to promote intergenerational lending as a way to help younger homebuyers access housing.

The main drawback is the higher rates typically charged on these mortgages. Perenna has yet to announce its interest rates, but Habito and Kensington charge significantly more than the market average for their long-term solutions.

For a 36-40 year flexible fixed term product, Kensington Mortgages’ lowest rate is currently 4.34 per cent with a £1,499 termination fee at 60 per cent LTV. The agreement also includes the option of a 10 percent overpayment and can be used to buy a home or mortgage your property.

The lender also offers a 95 percent LTV for the same term at 5.16 percent with the same termination fee and a 10 percent overpayment allowance. However, the loan is only available for purchases and not for remortgages.

So could long-term products become the norm? Who do they attract?

Let’s start with who would benefit from more of these products on the market.

Craig McKinlay, director of new business for Kensington Mortgages, says he’s seen a lot of long-term interest in his product from first-time buyers.

The 5 percent mortgage deposit option is attractive to those approaching the ladder, and the fixed rate provides security amid today’s interest rate uncertainty.

A longer-term mortgage also avoids the inevitable hassle and stress of remortgaging your property every two to five years. Instead, homeowners can financially plan further in advance with the security of knowing exactly what their mortgage payments will be over the long term.

Also, because the rate never changes, lenders don’t have to bother with a rate-based financial stress test for borrowers.

Earlier this year, the Bank of England removed its mandatory financial stress test that helped lenders determine whether potential borrowers could withstand rising interest rate changes. But experts hope lenders will still run their own similar tests before approving loans, especially with current inflation in other costs like energy bills.

McKinlay says the long-term product has been so popular that Kensington has had to restrict its offer to six times the borrower’s income, as the Bank of England only allows lenders to keep 15 per cent of their mortgage business above 4.5 times revenue.

While there are obvious benefits of long-term products for those looking to get on the housing ladder, these mortgages are not without their drawbacks.

Experts say building flexibility into long-term products will help them succeed, as borrowers will be more inclined toward a mortgage that allows penalty-free options.

Experts say building flexibility into long-term products will help them succeed, as borrowers will be more inclined toward a mortgage that allows penalty-free options.

The key to the viability of ultra-long-term products is offering borrowers flexibility, Sykes explains. Fifty or even 40 years is a long time to plan ahead and circumstances change.

One feature that borrowers may want to consider is a mortgage with no prepayment fees.

Rates are rising right now, but if they start to drop, those who are bound by 40-year terms could end up paying much more than the market average. If there were punitive prepayment fees to get out of the mortgage, they may have no choice but to pay the higher rates.

Ray Boulger, a senior manager at broker John Charcol, says that if lenders offer flexibility, for example by waiving ERCs and giving borrowers the ability to move mortgages to another property, long-term solutions are likely to come. come back popular

But he says the Bank of England should consider allowing banks to lend more than 15 percent of their mortgage book on 4.5 times the borrower’s income or more.

“Whether or not the BoE responds by addressing the flow limit will be very important in deciding who can access them,” he says.

The other group of borrowers who are interested in longer-term mortgages are those who are looking to buy their home ‘forever’ and may not move for the entire term of the loan.

They may be nearing the end of their current contract and are concerned about the impact of current rate hikes on their next mortgage. Locking in a long-term rate gives them certainty.

Will 50-year mortgages be the norm?

“There’s been nothing stopping major lenders from offering long-term products,” Boulger says.

But while that’s true, some banks and building societies consider long-term loans riskier, and there may be a lack of lenders willing to offer them.

There is also the question of whether British mortgage customers will be willing to adapt to this new form of borrowing.

“My personal opinion is that it will continue to be a niche product because British psyche is a two-year fix,” says McKinlay.

‘However, this is how most people in other countries buy their products, for example, a 30-year-old fix in the US. There is certainly a place for the right type of customer.’

And there is already talk of going one step further. Last month the government reportedly raised calls for encouraging 50-year ‘intergenerational’ mortgages that would allow children to inherit property with a mortgage as a way of getting on the housing ladder.

This is not what Perenna is looking to offer, but it is a potential product that could further diversify the market.

“As lenders, the key is to make sure the customer can repay the loan for the full term, and what can happen is that while the parents can afford it, the kids may not necessarily,” says McKinlay. “If they are taking it, we have to be very careful as lenders.”

The best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.

If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.

Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.

You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.

Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.

> Compare the best mortgage deals available now

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