Payment Terms

Can Repairing Your Mortgage For 40 YEARS Ever Pay Off?

A new mortgage that gives borrowers long-term certainty about how much monthly repayments they will need to make has received mixed reviews from experts.

Still, it can help some first-time buyers get a foot on the real estate ladder as they are more likely to be allowed to borrow large sums. Kensington Mortgages, which specializes in loans to those rejected by most traditional banks, has launched a fixed-rate long-term mortgage that allows borrowers to fix their payments over the life of the loan.

It can range from 11 to 40 years old. The rates range from 2.83 percent to over 4 percent for those who wish to fix for the 40-year term.

Building for the future: the new mortgage can help some first-time buyers get a foothold on the homeownership ladder

The “flexi fixed term” loan, announced in The Mail on Sunday last week, was welcomed by Treasury Minister John Glen, who said it offered borrowers “more options” – in particular for those “who estimate from 2.83% to more than 4%. hundred for those who are willing to fix for the 40 year term. The “flexi fixed term” loan, announced in The Mail on Sunday last week, was welcomed by Treasury Minister John Glen, who said it offered borrowers “more options” – in particular for those ‘who value the certainty of their repayments over a longer period of time’.

Governments, past and present, have long called on lenders to offer such long-term fixed rate loans.

Its launch is conveniently timed. It comes as borrowers expect mortgage rates to rise in response to an increase in the bank base rate that could occur as early as next month.

Plus, as inflation heads towards 5 percent, many homeowners are looking to fix the interest rate on their mortgages so they can control their household’s biggest monthly bill.

Yet skepticism reigns among some mortgage experts.

“Long-term fixed rate home loans are not a new innovation,” says David Hollingworth of broker L&C Mortgages, “and they tend not to capture the imagination of borrowers in large numbers”.

He says this is because the rates available on longer-term fixed-rate deals are inevitably higher than those found on popular shorter two- or five-year rates. This persuades many borrowers to opt for the immediate benefit of a cheaper solution in the short term rather than the potential long term benefit of an extended solution.

Onerous early redemption fees, Hollingworth adds, can also make long-term fixed rate deals unattractive, although he admits lenders are launching products with more user-friendly terms. For example Habito, which launched a 40-year fixed-rate loan in the spring of this year, does not impose prepayment penalties on its long-term loans.

Kensington will not apply such charges unless a borrower decides to remortgage to another lender. The fees could then reach 7% of the outstanding loan. It also won’t charge a fee if a borrower moves out or pays off the entire loan from the sale of the house.

Kensington boss Mark Arnold believes the new loans could provide an opportunity for some first-time buyers to step up on the property ladder “who would otherwise be left out”.

This is a view shared by Ray Boulger, senior technical director of mortgages at John Charcol. He says a mix of generous lending criteria – the ability to borrow six times the annual salary, mortgages at 95% of the loan value, and an affordable price based on the fixed interest rate, not on a higher standard variable rate – could “make all the difference” to whether first-time buyers can buy a property.

Last week, a Nationwide Building Society study indicated that affordability remains an acute issue for many aspiring first-time buyers due to home prices rising faster than average incomes.

The company’s house price-to-earnings ratio for first-time buyers in the UK has now hit an all-time high – surpassing its previous 2007 record – and confirms that finding a deposit is a “significant challenge” for potential buyers for the first time.

HOW PAYMENT NUMBERS STACK

A long-term fixed rate mortgage – ten years or more – will provide payment security. But that may not necessarily be in the financial interest of borrowers, depending on how mortgage rates move from here.

Typically, if rates rise sharply, a long-term borrower will receive counterparties. But if interest rate hikes are smoother, a better strategy may be to take out shorter fixed rate loans and then continue to remortgage.

Last week we asked Peter Gettins of L&C Mortgages to do some math. The results are speculative – who knows where interest rates will be ten years from now, let alone 40 – but interesting nonetheless.

We first asked him to calculate the total cost of a £ 195,000 40-year fixed rate repayment loan from Kensington. Assuming a loan-to-value ratio of 95%, the fixed rate would be set at 4.16% and would incur an arrangement fee of £ 1,499.

Then we asked him to calculate the total cost of a loan of the same size over the same term, but assuming that a borrower decides to gamble a bit and take out a new fixed rate every five years – so in fact , by remortgage seven times. The starting fixed rate is 2.84% (a deal that Skipton Building Society is currently offering, with an arrangement fee of £ 495). In an environment where interest rates rise – especially in the first five years – the 40-year fix is ​​cheaper.

Thus, assuming that fixed rates were to increase by a) 1% every five years; b) increase by 3% in the first five years, then by 0.5% every five years thereafter; or c) increase by 3% in the first five years – unchanged thereafter – the total mortgage charges (including arrangement fees) over the term of the loan would be as follows: a) £ 475,653 ; b) £ 526,032; and c) £ 469,901. These figures are all higher than the total cost of £ 402,055 of the Kensington loan.

It is only when we calculate the numbers for a scenario where mortgage rates remain stable for 15 years, then increase by 1% every five years, that the shorter-term repair option is cheaper (total costs over loan term of £ 386,234).

The same picture is repeated if the £ 195,000 loan is taken out over 30 years – at a fixed rate of 3.77 percent. Long-term fixation turns out to be cheaper in three of the four scenarios.

Of course, if a borrower takes the £ 195,000 loan over 25 years and renews it every five years, that will turn out to be a cheaper option overall than paying off the same loan over 40 years at a fixed rate of 4.16. % – regardless of which of the four interest rate scenarios is used.

Those with a 40-year term loan will pay less per month, but they will have to continue paying for an additional 15 years.

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