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

It can often be hard for many of us to think five years ahead financially, but a new lender will offer borrowers the chance to fix their mortgages for 50 years.

New lender Perenna has been granted a licence to offer a 50-year fixed rate mortgage in the UK, meaning people could lock in their home loan until 2072.

The idea is somewhat novel in a market where fixed rates of between two and five years are the norm.

But Perenna may not be alone for long. Chris Sykes, technical director at mortgage company Private Finance says that there are rumours in the market of more lenders bringing out a similar product.

‘I have heard of others looking at releasing these products – ultra-long term fixed, even prior to this news,’ so there could be some others in the pipeline in the medium term,’ he says.

Ultra-long products are not completely unheard of. Lender Kensington Mortgages, which specialises in lending to those with adverse credit, offers a fixed product with a term of anything between 11 and 40 years, while online lender and broker Habito has a similar deal.

In July the Government reportedly considered encouraging 50-year mortgages in order to promote intergenerational lending as a way to help younger buyers get onto the housing ladder.

The main snag is the higher rates that are typically charged on these mortgages. Perenna hasn’t yet announced its interest rates, but Habito and Kensington charge significantly more than the market average for their long-term fixes. 

So could longer term products become the norm, and who do they appeal to?

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

Craig McKinlay, new business director at Kensington Mortgages, says it has seen a lot of interest in its long-term product from first time buyers.

The 5 per cent deposit option on the mortgage is attractive to those getting a foot on the ladder, and the fixed rate provides security amid the ongoing interest rate uncertainty.

A longer term mortgage also avoids the inevitable hassle and stress of re-mortgaging your property every two or five years. Instead, homeowners can plan further ahead financially with the security of knowing exactly what their mortgage payments will be long term.

Furthermore, because the rate never changes lenders do not have to bother with a rate-based financial stress test for borrowers.

Earlier this year the Bank of England did away with its mandatory financial stress test that helped lenders determine if potential borrowers could withstand upward changes to interest rates. But experts expect lenders will still run their own similar tests before approving loans, especially with the current inflation to other costs such as energy bills.

McKinlay says the long-term product has been so popular Kensington has had to restrict offering it at six times borrower income, as the Bank of England only allows lenders to hold 15 per cent of their mortgage business above 4.5 times income.

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

Experts say that building flexibility into long-term products will help them succeed as borrowers will be more inclined towards a mortgage that allows options without penalties.

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

One feature borrowers may want to look out for is a mortgage with no early repayment charges. 

Rates are increasing at the moment, but if they started to go down then those locked in to 40 year terms could find themselves paying much more than the market average. If there were punitive early repayment fees for exiting the mortgage, they may have no option but to pay the increased rates. 

Ray Boulger, senior manager at broker John Charcol, says that if lenders offer flexibility, for example by not charging ERCs and giving borrowers the ability to port mortgages to another property, long-term fixes will likely become popular.

But he says the Bank of England should consider allowing banks to lend more than 15 per cent of their mortgage book on 4.5 times the borrower’s income or above.

‘Whether or not the BoE responds by addressing the flow limit will be very important to deciding who can access them,’ he says. 

The other group of borrowers who are interested in longer term mortgages are those who are looking to buy their ‘forever’ home, and may not move for the entire term of the loan. 

They may be coming to the end of their current deal and worried about the impact of the current rate rises on their next mortgage. Locking in a long-dated rate gives them certainty.

Will 50-year mortgages become the norm?

‘There has been nothing to stop the major lenders offering long term products,’ says Boulger.

But while that is true, longer-term loans are seen as riskier by some banks and building societies and there might be a lack of lenders who are willing to offer them. 

There is also the question of whether British 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 British psyche is a two year fix,’ says McKinlay.

‘However, it is how most people in other countries buy their products – for example a 30 year fix in the US. There is certainly a place for the right type of customer.’

And there is already talk of going one step further. Last month the Government reportedly mooted encouraging 50-year ‘intergenerational’ mortgages that would allow children to inherit a property with a mortgage as a way to get onto the housing ladder.

This is not what Perenna is looking to offer, but it is potential product that could further diversify the market.

‘As lenders the key thing is to make sure the customer can pay it for the loan for the full term and what may happen is that while the parents could pay it, the children may not necessarily be able to,’ says McKinlay. ‘If they are taking it on we have to be very careful as a lender.’

Best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England’s base rate has climbed rapidly.

If you are looking to buy your first home, move or remortgage, or are a buy-to-let landlord, it’s important to get good independent mortgage advice from a broker who can help you find the best deal. 

To help our readers find the best mortgage, This is Money has partnered with independent fee-free broker L&C.

Our mortgage calculator powered by L&C can let you filter deals to see which ones suit your home’s value and level of deposit.

You can also compare different mortgage fixed rate lengths, from two-year fixes, to five-year fixes and ten-year fixes, with monthly and total costs shown.

Use the tool at the link below to compare the best deals, factoring in both fees and rates. You can also start an application online in your own time and save it as you go along.

> Compare the best mortgage deals available now