50-year fixed rate mortgages: Mistake, misguided or misdirection?
Even the busiest of contractors will have spotted that UK finance regulators have granted a license to specialist lender Perenna to issue 50-year fixed rate mortgages.
It’s fair to say that no one saw this coming – not even us contractor mortgage brokers, writes John Yerou, CEO of Freelancer Financials. And partly because it was so unexpected, the announcement of a 50-year fix has received mixed views.
Some critics go as far as to say 50-year fixes pose a considerable risk for the housing market, highlighting the real possibility of higher total repayments. So, why the need for such mortgages, and why now?
More questions than answers, whether you’re a fan of long fixes or not
Let me put my cards on the table. I’m not a big fan of fixed rates longer than five years. So, 50 years? I don’t think there’s a market for them. Given the low take-up of recent 10-year fixed-rate products, we don’t anticipate strong demand for longer-term fixed-rate options, especially 50-year mortgages.
Perenna, the new specialist lender granted the license, is looking to launch its products in 2023 (once its systems are built!). But its name is about all we know about this new kid on the lending block. We know nothing of the lending criteria for the 50-year fix, let alone whether the lender will be contractor-friendly or not.
Presently, the longest fixed-rate mortgage offered by lenders in the UK is 10 years. And, yes, I concede that a 50-year fixed-term mortgage would help improve affordability. Stretching the loan over 50 years would indeed reduce monthly payments. But accruing interest over 50 years compared to 25? It will be interesting to see where the lender pitches the interest rate and what that means to the overall repayable amount.
Classic government misdirection?
The outgoing prime minister Boris Johnson said last month that he would back 50-year mortgages. He believes they will allow more young people to potentially get on the property ladder rather than rent. So expect the slogan “Turn Generation Rent into Generation Buy” from the government some time soon. It’s a great soundbite, but nonetheless puzzling.
Questions we’d like to ask. What happened to the government building more affordable housing? Consecutive governments have failed to address the fundamental issue that is the UK’s housing shortage. Even worse, and I hesitate to get political but -- what happened to ‘levelling up’?
Instead of addressing the core issues of the housing market, the government appears to be washing its hands of the crisis. With these new 50-year mortgages, it looks like the government wants us to load monumental long-term debt onto our children if we die without paying the loan off.
Additional questions that maybe the new prime minister might like to answer
Another question – potentially for Mr Johnson’s successor. Isn’t it everyone’s dream to pay off their house before they retire and live out a mortgage-free retirement? What happens if you take out one of these 50-year mortgages when you’re 30? Would you still want to be paying it off when you’re 80? No, I don’t think so either.
But setting aside the morality of palming off debt onto our children, let me reiterate. Fifty-year mortgages fall short of addressing the key issues of housing shortages and (still) rising house prices.
How will 50-year fixed mortgages be structured?
For these long-term mortgages to be successful, they need to be flexible. That means accommodating potential lifestyle changes, such as house moves, or emigration, without overly penalising borrowers.
Is Perenna that flexible? It’s too early to say as they’re yet to launch. But they claim to be, with their website stating the following regarding their long-term mortgages:
“We expect our mortgages to be portable (so you can take it with you to your next home) and transferrable (so you can sell it with your house). Early repayment charges will apply to our mortgages but they are likely to be for a maximum of 5 years, similar to a current 5-year fixed mortgage.”
In this extract, they state that the mortgage is transferable. In other words, you can sell it with the house. We’re not entirely sure how that will work. Is it even possible? To be honest, after reading their website, we sense that not everything has been thought through.
The pertinent bit of the above statement is:
‘Early repayment charges will apply to [their] mortgages but they are likely to be for a maximum of 5 years.’
It always worries me when financial companies use words like “Expect” and “Likely”. So personally, I see red flags here, which isn’t what contractors want as they batten down the hatches and move their prudence up a gear, as the cost of living crisis continues.
Will other lenders follow suit and introduce extra-long mortgage fixed terms?
We should acknowledge that all of us have to wait and see what the lending criteria for 50-yer fixes is going to be. Will they be more though? At the time of writing, the general consensus in the mortgage market is that it believes overly long fixes are unlikely. Several lenders have introduced 10-year fixes, but the demand has been low. Only a very small proportion of borrowers opt to fix for 10 years or longer.
There are instances where we’ve secured 35 to 40-year mortgage terms for our clients where it made sense. But those are typically on standard five-year fixed-rate mortgages, which achieve a similar affordability uplift at only 95% LTV (5% deposit). With those types of mortgage loans already available, do we really need a 50-year fixed rate? Unfortunately for some, I think not.
Find out more on contractor mortgages here.