The latest announcement that a specialist lender has been given a licence to off 50-year fixed-rate mortgages poses a considerable risk for the housing market, according to several key voices within the property industry.
Perenna, a specialist lender, has been granted a UK banking licence, green-lighting plans for the introduction of their 30 to 50-year mortgages. Currently, the longest fixed-rate mortgage offered by banks in the UK is 10 years, though more firms are exploring the possibility of longer mortgages.
The government earlier this year proposed 50-year mortgages as an attempt to solve the issues on the housing market, with some describing the fix as “creative”.
Although, this plan was lambasted by Anthony Codling, CEO of Twindig who stated this is, “just kicking the can down the road”, and would lead to generational debt, as well as potentially increasing house prices.
David Alexander, the chief executive officer of DJ Alexander Scotland, said that the policy could “encourage a short-term boom in the housing market, followed by a long-term bust.” He continued:
“While it is right that governments should seek to introduce policies that enable more people to buy their own homes, this is one idea which simply won’t work. Having housing debt last 50 years, even at a fixed rate, with the very real potential for this debt to transfer down the generations, is a policy that will cause stagnation in the housing market rather than growth.
With people stuck on 50-year mortgages, they are unlikely to be able to afford to move as it will take decades for equity to accrue, debt will remain very high for years resulting in the bulk of repayments being made against interest, and there will be little opportunity or ability to move home, despite the likelihood of changed circumstances.
While it may suit a young couple who borrow on this basis in their twenties, this could become a burden when they start a family and need to borrow more to buy a larger home. After a decade, they will have paid off very little and any accrual in value will be matched in the property market they live in limiting their options to change home.
With the housing market tightening and the potential for a fall in prices, now is not the moment to fuel growth in the housing market. What the housing market does not need are longer mortgages, less stringent affordability criteria, or higher borrowing multiples. If the government really wants to stabilise or reduce prices, then they need to increase supply. Demand has been outstripping supply for years in both social housing and the private sector and, unless this is resolved, there will continue to be housing shortages and rising prices.”
However, Stephen Dickinson of Momentum Mortgages praised the plans, despite being potentially “costly in terms of the rate and also the total cost over such a long period”. He stated:
“With rates rising and uncertainty over inflation and the economy, this is a really big plus point for some.
Longer term means lower repayments – being able to spread the cost over longer means paying lower monthly repayments for younger borrowers in their 20s who are just starting out this could be perfect especially as rising house prices mean that mortgages are needing to be higher and that is reflecting in the payments.”
Regardless, other banks and building societies do not seem keen to follow these long-term fixed-rate mortgages. UK Finance shows the average length of mortgages taken in 2022 is 27 years and the mortgages with terms over five years is only slightly above 2%.
One such building society is Nationwide. A spokesperson for the society said the limit they offered was 10 years and demand for longer mortgages is not apparent as “only a very small proportion opt to fix for that long”. They continued:
“Given the low take-up of 10-year products, we don’t anticipate strong demand for longer term fixed-rate options, and we have no plans to launch any.
(Although they) enable improved affordability by reducing the need to stress test for future interest rate rises.
However, similar affordability uplifts can be achieved on standard five-year fixed rates, as evidenced by our Helping Hand proposition, which allows first-time buyers to borrow up to 5.5x income up to a maximum 95 per cent per cent LTV.”
