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

It may be difficult for many of us to think financially for the next five years, but a new lender may offer borrowers the chance to fix their 50-year mortgages.

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

The idea is fairly new in a market where fixed rates between two and five years are the norm.

But Pierina may not be alone for long. Chris Sykes, technical director at mortgage firm Private Finance, says there are rumors in the market of more lenders offering a similar product.

“I’ve heard of others looking at launching these products — flat for the very long term, even before this news,” he says, “so there may be some others in the pipeline in the medium term.”

Extra long products aren’t completely unheard of. Lender Kensington Mortgages, which specializes in lending to those with negative credit, offers a fixed product for 11-40 years, while online lender and broker Habito has a similar deal.

The government in July reportedly considered promoting 50-year mortgages in order to boost intergenerational lending as a way to help younger buyers move up the housing ladder.

The main hurdle is the higher rates that are usually charged on these mortgages. Perenna has yet to announce interest rates, but Habito and Kensington charge fees well above the market average for their long-term repairs.

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

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

So could long-running products become the norm, and who would appeal to them?

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

Kensington Mortgages New Business Director Craig McKinlay says he has noticed great interest in its long-term product from first-time buyers.

The option of a 5 percent deposit on a mortgage is attractive to those moving up the ladder, and the fixed rate offers safety amid ongoing uncertainty over interest rates.

A long-term mortgage also avoids the inevitable hassle and pressure of remortgaging your property every two or five years. Alternatively, homeowners can plan ahead financially while ensuring they know their mortgage payments for the long haul.

Furthermore, since 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 eliminated a mandatory financial stress test that helped lenders determine whether potential borrowers could withstand upward changes in interest rates. But experts predict that lenders will continue to run their own similar tests before approving loans, especially with the current inflation of other costs such as energy bills.

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

While there are clear benefits to long-term products for those looking to get onto the housing ladder, these mortgages are not without their downsides.

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

One feature that borrowers may want to look for is a no early payment fee mortgage.

Prices are increasing at the moment, but if they start to fall, those who have been locked in for 40 years could find themselves paying much more than the market average. If there is a disciplinary early payment fee to get out of the mortgage, they may have no choice but to pay the increased rates.

Ray Bolger, senior director at broker John Charcole, says that if lenders offer flexibility, for example by not charging ERC and giving borrowers the ability to roll over mortgages into another property, long-term fixes are likely to become common.

But he says the BoE should consider allowing banks to lend more than 15 per cent of the mortgage book at 4.5 times the borrower’s income or more.

“Whether or not the Bank of England responds by addressing flow limits will be very important for determining who gets access to them,” he says.

The other group of borrowers interested in long-term mortgages are those who are looking to purchase their “forever” home, and may not move for the life of the loan.

They may have reached the end of their current deal and are concerned about the impact of the current interest rate hike on their next mortgage. Holding a price for the long term gives them certainty.

Will 50-year mortgages become the norm?

“There was nothing stopping the major lenders from offering long-term products,” Bolger says.

But while this is true, long-term loans are viewed by some banks and construction organizations as riskier, and there may be a shortage of lenders willing to provide them.

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

“My personal opinion is that it will remain a niche product because the psyche of the British is a two-year fix,” McKinlay says.

However, the way most people in other countries buy their products – eg 30 year fix in the US. There is certainly a place for the right kind of clientele.

There is already talk of going further. Reportedly, last month, the government discussed encouraging “intergenerational” 50-year mortgages that would allow children to inherit property with a mortgage as a way to get up 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 thing is to make sure that the customer can repay the loan for the full term and what may happen is that while the parents can pay it, the children may not necessarily be able to,” McKinlay says. “If they take it we have to be very careful as a lender.”