A flurry of 40 year fixed rate mortgages is expected to become available to offer property buyers longer term mortgages with a deposit of just 10% in a ‘deal for life’.
Mortgage lending at the start of 2021 has been higher than at any time since the financial crisis of 2008 and 4.2% higher year on year. At the same time, mortgage loan to value has increased by 4.5% over the year and is at its highest level since 2007, when the measure was first recorded. Mortgage arrears are also on the increase, currently at 0.93% compared to 3.64% after the financial crisis.
Longer term mortgages may be new to house buyers in the UK, but has been around for some time in other countries including the US, France and Denmark.
A fixed rate means that monthly repayments will remain the same throughout the term of the mortgage. What’s more, there will be no early repayment charges and no exit fees, so the borrower has full flexibility to switch mortgages or move home.
The longer-term mortgage means that many homeowners will never again have to renegotiate a mortgage.
Switching a mortgage can be expensive. Most fixed rates are between two and five years, leaving borrowers ‘trapped’ in a cycle of rearranging their mortgage. Borrowers then pay associated fees which can be in the thousands of pounds, perhaps up to ten times during the term of a mortgage.
Online mortgage portal, Habito, is offering one such mortgage with a product fee of £1,995 and a rate of just under 6% fixed for a 40 year term, although a 40% deposit is required. Further fees are then only charged if the mortgage is increased. Moreover, you can take your mortgage with you when you move.
Sound expensive? Those of us who remember mortgage rates reaching 16% in the 1990s will be seething with jealousy.
Paying a mortgage over a longer period can make the repayments more affordable but the total amount paid over the term can be considerably more than over a shorter term as you’ll be paying interest for longer. It makes more financial sense to take out a shorter term mortgage if you can afford it.
Taking out a longer term mortgage could make it difficult for a lender to help you by extending the term of the mortgage, should you experience financial problems in the future. This may particularly affect older home buyers where a mortgage lender may not be willing to extend the term into your older retirement years.
However, a longer term mortgage with no early repayment charges might allow for overpayments. You should take advice and check with your lender before making any financial commitment.