Tim Leonard
It is rarely easy being a first-time buyer. Saving a large enough deposit and finding an affordable house are the perennial challenges – the problem now is that the cost of living crisis and rising mortgage rates are set to make achieving both of these goals even more difficult. Indeed, according to property portal Zoopla, a typical first-time buyer will need to find an additional £12,250 in income to realise their homeownership dreams if the 2% mortgage rate they’ve been eyeing up suddenly becomes 4%.
So what can be done to help?
When the then Prime Minister Boris Johnson was recently asked for his thoughts, he revealed that the idea of “ultra-long” mortgages with the potential to be handed down from generation to generation was being considered by the government. A matter of weeks later, a new lender received permission from the Financial Conduct Authority (FCA) and the Bank of England to offer mortgages to UK borrowers that could be fixed for a period of time that certainly fits the description of ultra-long.
The lender in question, Perenna, has made clear its plans to launch a 30-year fixed-rate mortgage in 2023. And if that’s not long enough, the Financial Times suggests the lender is willing and, thanks to its new FCA permission, now able to introduce a 50-year fixed-rate mortgage when it wishes to do so. Currently, the longest fixed-rate mortgages available in the UK are for 40 years, through Kensington Mortgages and mortgage broker Habito.
The big question is whether such ultra-long mortgages can genuinely help make it easier for aspirational buyers to reach the first rung of the property ladder.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
Are 50-year mortgages a good idea?
As you might expect, mortgage experts can see some merit in the 50-year fixed-rate mortgage idea, but potential drawbacks too.
“On the plus side, some borrowers might welcome the certainty of knowing that they would be paying a fixed amount throughout the entire life of the mortgage – and end up mortgage-free,” says Kate Davies, executive director of trade body the Intermediary Mortgage Lenders Association (IMLA). “Indeed, as they get closer to the 50th year of their loan – the proportion of their income being spent on the mortgage is likely to be significantly smaller compared to what they paid at the outset, and represent a much smaller (and more affordable) proportion of income.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, agrees that being able to fix a mortgage for up to 50 years could help with budgeting and affordability because “a longer term means cheaper monthly payments”, and would offer borrowers protection from potential interest rate rises. “It would also mean that you don’t have to remortgage every couple of years, which would be the case if you opted for a shorter fix, saving you remortgage costs,” he adds.
Where could ultra-long mortgages fall short?
On the flipside, there are warnings that paying a mortgage back over a longer period of time inevitably means it will end up costing borrowers more overall, even if the monthly payments are lower.
Knowing that your mortgage payments would never decrease, even if interest rates were to fall, is another issue that Harris says borrowers would need to come to terms with, along with the potential cost of early repayment charges that might apply if someone wanted to leave an ultra-long mortgage early.
“Extending the term can make the mortgage more ‘affordable’ but would help push property prices up further still and would mean many people are paying mortgages well into retirement, or passing on that debt to their children, which creates other problems,” he adds.
How popular could a 50-year fix be?
As to whether 50-year fixed-rate mortgages have the potential to one day prove a popular borrowing option in the UK or are only ever likely to appeal to a select group of borrowers, the consensus, for now, appears to be with the latter.
While pointing out that much would depend on the flexibility of the mortgage and whether it could be ported to another property or enlarged if the borrower wished to borrow more, Davies says it’s currently difficult to see 50-year mortgages becoming more than a “niche sector” in the foreseeable future.
“The total amount that a borrower would repay over 50 years would be significantly more than would be paid over a 25- or 30-year term,” she explains. “Unless a prospective borrower were very confident about committing to such a long contract, this could deter many from choosing this option to get on the ladder.”
A similar conclusion is drawn by Harris, who accepts that cheap, 10-year fixes have become increasingly popular among certain borrowers in the past couple of years, but adds that the tendency among most is still to opt for two- or five-year fixed-rate mortgages because they provide certainty without tying people in for an onerous length of time.
“Given the lack of take-up of long-term fixes, it is highly unlikely that 50-year fixed-rate mortgages would appeal to more than a small number of borrowers,” he adds.
What can first-time buyers do?
If 50-year fixed-rate mortgages aren’t likely to be the answer to every first-time buyers’ struggles, then the obvious question remains as to what is.
One of the main problems is a shortage of houses suited to those trying to make their way on to the property ladder.
“With demand outstripping supply, property prices continue to rise,” Harris explains. “Longer mortgages won’t solve the problem of lack of stock, so making it easier to get new homes built, of the type people want to buy in the places they wish to live, would be a good start.”
Of course, getting houses built is the responsibility of the government rather than the people who want somewhere to live. But what first-time buyers can do is carefully research the area they want to live in and act fast as soon as a property that might suit them comes on the market.
In this respect, preparation is also key, including having a suitable deposit saved up and ready to go, and working out whether a first-time-buyer mortgage is realistically within reach.
Note: The content of this article doesn’t constitute advice, but as guidance and commentary on the mortgage market.
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