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

Online broker Habito has launched Britain’s first 40-year fixed-rate mortgage. Nicole Garcia Merida runs an eye over what’s on offer.

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%.

Recommended

What to do as the age of cheap money and overpriced equities ends
Investment strategy

What to do as the age of cheap money and overpriced equities ends

The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losin…
29 Sep 2022
These 3 top value stocks offer
Share tips

These 3 top value stocks offer

Professional investor Adam Rackley of Cape Wrath Capital highlights three overlooked value stocks to buy.
29 Sep 2022
Why everyone is over-reacting to the mini-Budget
Budget

Why everyone is over-reacting to the mini-Budget

Most analyses of the chancellor’s mini-Budget speech have failed to grasp its purpose and significance, says Max King
29 Sep 2022
Bank of England spends £65bn to “restore orderly market conditions”
Budget

Bank of England spends £65bn to “restore orderly market conditions”

The Bank of England has said it will spend £65bn buying bonds to stabilise the financial markets after the government’s mini-Budget. Saloni Sardana ex…
29 Sep 2022

Most Popular

Earn 4.1% from the best savings accounts
Savings

Earn 4.1% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
27 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022
What changes to the pensions charge cap mean for you
Pensions

What changes to the pensions charge cap mean for you

The government could raise the pensions charge cap – the amount you can be charged in your workplace's default pension fund. Saloni Sardana explains w…
27 Sep 2022