Will Britain’s first 40-year fixed-rate mortgage tempt buyers?

Why on earth would anyone want a 40-year fixed-rate mortgage? asks Sarah Davidson on inews. The truth is, however, that “it’s not as mad as you think”. 

Lender and online mortgage broker Habito launched Britain’s first 40-year fixed-rate mortgage this week with Habito One, which will offer fixed rate periods of between ten and 40 years. Until now, the standard repayment term for a mortgage has been 25 years at a variable rate of interest, with rates fixed, perhaps, for the first two or three years.

What’s on offer

The deal will be available  in England and Wales from next week to first-time buyers, those moving home and those remortgaging. Interest rates will start at 2.99% for a ten to 15 year fix at 60% loan-to-value (LTV), and you can borrow up to 90% of the value of the property. The more you borrow, and the longer the term, the higher the interest rate. Habito plans to introduce 95% LTV products from the summer after the government’s announcement of a mortgage guarantee in the Budget last week. 

It does come with a £1,995 arrangement fee, however. And with mortgage fees “typically around £1,000”, says Kit Sproson on MoneySavingExpert, that’s “on the high side”. The upside is that it’s not subject to early repayment charges or exit fees, meaning borrowers are not necessarily shackled into the loan for the full 40 years and do have the freedom to move home when they need without financial penalty. It is also portable, so can be taken with you when you move.

The absence of early repayment charges should be encouraging to borrowers, who will also benefit from protection against potential changes in interest rates. While 40 years does seem like a really long time – and it is – knowing what your payment is going to be every month for the next 40 years will help with budgeting, so it could be very appealing for some buyers. It may be a bit of a gamble, but interest rates could go sky high at some point in the next four decades. 

Three’s plenty of demand for mortgages

But appetite for standard mortgages is far from lacking. The number of mortgages agreed for early 2021 was 24.2% higher than the year before and is at its highest level since 2007, says the Bank of England. 

Mortgages are being “snapped up” at the fastest rate since before the financial crisis, says Sarah Coles, personal finance analyst at Hargreaves Lansdown – “and that was even before we knew the stamp duty holiday would be extended”. But for those after a mortgage with a high loan to value ratio, “deals are thinner on the ground than they have been at any time since 2007”.  In that context it makes sense that the government’s push on turning “generation rent” into “generation buy” took a turn into offering 95% mortgage guarantees. 

It’s a good thing that the market is evolving. But as we’ve said before, higher loan-to-value mortgage offerings coupled with low interest rates will inevitably push house prices higher, making them more unaffordable in the long run. Estate agencies have begun revising their forecasts for the coming year in light of all the new mortgage offerings. Knight Frank expects UK house prices to jump by 5% in 2021 from a forecast of zero at the start of the year. Savills points out that despite a record 10% contraction in the economy last year, house prices jumped by 7.3%. And it too revised its house price growth estimate from 0% at the start of the year to 4.4%.