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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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%.
-
House prices rise 2.9% – will the recovery continue?House prices grew by 2.9% on an annual basis in September. Will Budget policies and ‘higher-for-longer’ rates dent the recovery?
-
Nvidia earnings: what to expectNvidia announces earnings after market close on 20 November. What should investors expect from the semiconductor giant?
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
How to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend
-
John Lewis mulls buy now, pay later schemeThe CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
-
State pension triple lock at risk as cost balloonsThe cost of the state pension triple lock could be far higher than expected due to record wage growth. Will the government keep the policy in place in 2024?
-
Paragon raises rate on one-year fixed cash ISA to 5.75%Paragon Bank ups its one-year fixed cash ISA rate to 5.75% - is it enough to top the table?
