Monday, November 29, 2021

Why the newest 40 year fixed-rate mortgage deal is more enticing than it sounds

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Data from Moneyfacts shows the number of 40-year mortgages available is now 146

Fixing your interest payments over this period may sound trite, and indeed, very long-term fixed rates are not viewed as inflexible by either borrowers or industry representatives. I’m not entirely sure I agree with this view, depending on the fine print on each product.

Another 40-year fixed-rate mortgage was launched this week, this one from specialist lender Kensington, which is only available through mortgage brokers. This is followed by a 40-year fixed-rate contract offered earlier this year by a new lender named Habito.

I have several reasons for this. First, the seemingly unstoppable rise in house prices and inconsistent wages have resulted in an increasing number of first-time buyers taking out longer mortgages. Data from Moneyfacts shows that the number of 40-year mortgages available is now 146, which shows that there is some demand from borrowers.

However, a 40-year term should not be confused with a 40-year fixed interest rate; Many new homeowners choose to borrow for 40 years to lower their monthly payments and later, when they earn more, reschedule to shorter terms to save themselves unnecessary interest.

A 40 year fixation has long been something the market couldn’t offer, mainly because of the way mortgages are usually funded. A term of 40 years would be prohibitively expensive on the capital market. But first Habito and now Kensington solved that problem, and Kensington’s deal is really an interesting one. It is funded by Rothesay Life, the UK’s largest pension specialist, so the pricing is much more realistic.

At 60 percent loan-to-value, the interest rates start at 2.83 percent for a term of 15 years, 2.85 percent for 25 years and 2.90 percent for 30 years. There are no early repayment fees if the customer sells or moves, which is critical to the running of this business, and overpayments are allowed up to 10 percent of the remaining mortgage balance per calendar year.

Affordability is based on the fixed rate, not a higher standard floating stress rate; Finally, the mortgage can be transferred to a new property; whereby the rate and the fixed monthly payment remain the same.

If more insurers follow Rothesay’s lead, the shape of the mortgage market could change forever. My second reason for skepticism that “nobody wants to fix for that long” is reflected in the fact that Kensington mortgage brokers whose clients take over the business pay a finder fee – a commission – of 0.75 percent of the balance.

Two- and five-year contracts pay between 0.25 and 0.45 percent commission. This looks to me like compensation for the broker who foregoes future rescheduling commissions when recommending a long-term solution. Third reason – interest rates are incredibly low and only go one way – up. Given that this mortgage is so flexible and you can overpay, I am tempted.

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