High property prices, a cost-of-living crisis and now rapidly rising interest rates have resulted in far more homebuyers opting for 30-year-plus mortgage terms.
It is not hard to see why these longer-term deals are attractive: borrowing a larger sum over a longer term reduces monthly costs, helping homebuyers meet ever-stretching affordability criteria. However, this does mean borrowers pay significantly more in interest charges overall, if they hold the mortgage to term.
This does not appear to be deterring homebuyers at present, though. The latest figures from UK Finance show sales of these 30-year-plus terms growing at the fastest rate on record. In total, two in five mortgages taken out in June had a term of at least three decades, while almost half (47%) of first-time buyer mortgages were for at least a 30-year term.
We are aiming to provide mortgages in the sweet spot of around 30 to 35 years
Given that the average age of a first-time buyer is now 32, this effectively means their mortgage will cover most of their working life.
Connect for Mortgages director, mortgages, Jane Benjamin thinks these longer-term deals are set to become ever more popular.
“I would expect 30-year-plus terms to become the ‘go to’ for first-time buyers as affordability is already tight, especially for those with small deposits and lower incomes.”
Next-time buyers
L&C Mortgages associate director David Hollingworth says such longer-term deals particularly appeal to first-time buyers at present but are not limited to this group.
“It’s something we also see with ‘next time’ buyers, particularly if they are upsizing to a significantly more expensive family home,” he says.
“But age will also have a part to play because many lenders will have a maximum age at the end of the mortgage term. This means older borrowers will find their age limits the maximum term over time.”
It is more important to have a mortgage that is affordable and if this means stretching the term out then so be it
As well as looking to increase their overall mortgage term, many of these over-stretched borrowers are looking at longer-term fixes, given the rising interest rate environment.
Brokers report that five-year fixes have become more popular than two-year options in recent months — that is, before lenders started withdrawing both two- and five-year fixes in the wake of market volatility following the recent ‘mini’ Budget.
Over the past year the mortgage industry has begun to introduce some medium-term options, with more seven- and 10-year fixes, although brokers report that demand for these options is still relatively muted.
Mortgages for Business head of residential mortgages Neil Bishop explains: “Quite a few lenders have reviewed their seven- and 10-year offerings recently, but I don’t think the take-up has increased that much.
A 50-year mortgage term is just for headlines. It does not work
“There is a market for longer-term fixes, but we haven’t seen a marked increase in the number of people opting for seven- and 10-year fixes.
“I think people consider it, and then realise the early repayment charges [ERCs] really restrict their future plans so, unless they’re confident they’re not going to move or need to remortgage to release funds, it’s better to keep their options open.”
‘Product of choice’
But one new lender in the market is looking to capitalise on both the trend for longer-term mortgages and the desire for more certainty around rates.
Perenna recently received its banking licence and is planning to launch a 30-year fixed-rate mortgage in the first half of next year. Unlike most 10-year fixes, this will impose ERCs for only the first five years.
Perenna co-founder and chief operating officer Colin Bell says this gives borrowers the security of knowing mortgage payments will not rise over the whole term — regardless of external interest rate movements — while also retaining the flexibility to remortgage, switch product or pay down the loan after the initial five-year period.
If these mortgages increase affordability then they are a good thing to offer
This is likely to appeal to customers in the current climate, he says. After more than a decade of ultra-low interest rates, recent events have shown how quickly rates can move upwards when conditions change.
Bell says, unlike traditional short-term fixed rates that are funded through swap rates on money markets, these mortgages will be backed by bonds that are sold to institutional investors, primarily insurance companies and pension funds.
“This model may be new to the UK but it is established in a number of countries, including Denmark, the Netherlands, Germany and the US — where around 80% to 90% of their mortgages are longer-term fixes of 20-plus years,” he says.
I would expect 30-year-plus terms to become the ‘go to’ for first-time buyers as affordability is already tight
Bell adds, where such deals are available, they have become “the product of choice” for consumers. He anticipates these longer-term fixes gaining similar traction in the UK.
Perenna has stated that it could offer longer-term fixes, including a 50-year term. But Bell says this isn’t necessarily the new bank’s main focus.
“We are aiming to provide mortgages in the sweet spot of around 30 to 35 years,” he says.
Broker channel
Perenna aims to be an intermediary-led business and will distribute these new products through the broker channel.
There is certainly interest among brokers about the prospect of longer-term fixes, although some have questioned the feasibility of offering 50-year mortgage deals.
On standard residential deals the maximum mortgage term is currently 40 years and SPF Private Clients chief executive Mark Harris says Perenna would be creating a niche by launching a 50-year product.
I think people consider it, and then realise the early repayment charges really restrict their future plans
He notes, however, that there are a few specialist lenders, such as Hodge and Livemore, who offer 40-year-plus terms, although these are aimed more at the retirement market rather than at those buying their first home.
Brokers think there may be an appetite for a 30-year fixed-rate mortgage, although it will of course depend on pricing.
We Are Money founding adviser Jonathan Burridge says: “The devil will be in the detail. There are scant details on Perenna’s offering to date, but to receive Prudential Regulation Authority and Financial Conduct Authority approval it will have had to demonstrate appropriate customer outcomes and a market for its offering.”
Burridge says he welcomes this innovation, however.
Most brokers expect rates on these longer-term fixes to be priced above the most competitive short-term options. If this is the case, borrowers will have to decide whether they want to pay a premium, in the short term at least, for the peace of mind that their mortgage payments will never increase.
Viable product?
Although this product has yet to come to market, some brokers have expressed concern about the trend towards ever-increasing mortgage terms, and many are not convinced a 50-year term will appeal to sufficient borrowers to be a viable product.
As long as lenders maintain their current rules around lending into retirement, a shift to a 50-year term might give some borrowers extra comfort
Shaw Financial services founder Lewis Shaw says there is a danger that increasing mortgage terms to allow homebuyers to borrow more will simply fuel house price inflation in what is already an over-heated market.
Other brokers are concerned about the regulatory implications of a 50-year mortgage, which would mean the term extended into retirement in many cases.
Harmony Financial Services director Imran Hussain does not think this is a practical option.
“A 50-year mortgage term is just for headlines. With the average first-time buyer now in their 30s, this does not work, given the state retirement age is 68,” he says.
Staton Mortgages director Mike Staton agrees.
“A 50-year term might sound appealing at the moment but it is simply unrealistic; because, unless you apply for a mortgage at 18 years old, it is likely to take you beyond your retirement age.”
This model may be new to the UK but it is established in a number of countries, including Denmark, the Netherlands, Germany and the US
Emma Jones, managing director of brokerage When The Bank Says No, doesn’t think this will appeal to borrowers.
“A lot of clients we see now worry about taking a 40-year term, and opt for 35 years instead because of the fear of taking a mortgage too close to retirement.”
‘Extra comfort’
But this opinion isn’t unanimous. Some brokers don’t envisage a major hurdle, with current regulation allowing for mortgage terms to extend beyond state retirement age.
Carl Summers Financial Services financial adviser Scott Taylor-Barr says: “Many lenders offer a 40-year maximum mortgage term, so extending this to 50 does not seem like a huge move from a lender perspective.
“And, in terms of borrowers, as long as lenders maintain their current rules around lending into retirement, a shift to a 50-year term might give some extra comfort. Most 20-somethings I speak to can’t see themselves retiring until they are 70 or 75, so a mortgage term to that age fits with their financial plans.”
Taylor-Barr notes that the state retirement age, currently 68, is likely to move upwards in future.
A lot of clients now worry about taking a 40-year term, and opt for 35 years instead because of the fear of taking a mortgage too close to retirement
But Bishop points out that, while current FCA rules allow borrowers to extend a mortgage into their 70s, this may not help younger borrowers who want a 30-year-plus mortgage term.
“Most lenders are happy for mortgage terms to run until the borrow is 70. For some, if the borrower does a non-physical job, they will consider that up to the age of 75,” he says.
But he notes lenders will require proof of pension income to facilitate borrowing past age 75 and this will not be easy for borrowers in their 20s or 30s at the start of their working life.
Regulation
FCA rules stipulate that, regardless of mortgage term, lenders — and intermediaries — have a responsibility to look at borrowers’ needs and circumstances to ensure any recommended mortgage is suitable. This should include any changes to income during the term, which might affect affordability.
While not specifically outlawing a 40- or 50-year mortgage term, these suitability rules could place restrictions when recommending a mortgage that extends into retirement that is decades away.
There is a market for longer-term fixes, but we haven’t seen a marked increase in the number of people opting for seven- and 10-year fixes
However, many point out that these longer-term deals — be they 30, 40 or 50 years — may prove a lifeline for borrowers who otherwise could not afford a property. As many brokers observe, there is always the option for paying down the mortgage at an earlier date, or refinancing onto a shorter-term deal if financial circumstances improve.
Finanze head of regulated and term finance Imogen Sporle says: “If these mortgages increase affordability then they are a good thing to offer. Borrowers are more likely to keep up with smaller monthly repayments and not default.
“It may be financially beneficial for people to use these longer-term mortgages if it helps get them onto the housing ladder.”
Key Mortgages director Ryan Joyce agrees.
“It is more important to have a mortgage that is affordable and if this means stretching the term out then so be it,” he says.
Older borrowers will find their age limits the maximum term over time
“A longer term on your mortgage is still better than renting: at least there is an end date in sight, even if it is in your 70s. This is not the case with renting; you will always be paying it.”
The emergence of these longer-term deals will ensure that brokers maintain a key role in understanding borrowers’ financial circumstances. They can assess how things may change in both the near and long terms, while also explaining potential benefits and drawbacks.
Joyce says: “We as brokers just need to ensure the mortgage will be affordable in later life, and follow the same procedures we have now. It shouldn’t make much difference.”
This article featured in the October 2022 edition of MS.
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