11 March 2021
40-year fixed rate mortgage launches but will borrowers be interested?
Borrowers looking for extended protection against potential interest rate rises will be able to fix their mortgage for 40 years following the launch of the longest fixed-rate mortgage.
With most borrowers tending to fix for two or five years, it will be interesting to see how many will opt for 40 years. When lenders have launched 10 or 15-year fixes in the past, there has been little interest as longer fixes tend to be expensive compared with shorter-term deals. They also have hefty early repayment charges (ERCs) for the length of the fixed period. Ten or 15 years is a long time to commit for and much can change during that time. Shorter fixes, on the other hand, give some protection but also flexibility, because borrowers are not tied in for too long.
The lender providing the 40-year fix argues that it removes the need to remortgage every few years, saving borrowers money on product fees and removing the risk of having to move onto a higher rate. Also, the big advantage of this new deal is that there are no ERCs at any time, which have always been the big deterrent to fixing for lengthy periods.
However, borrowers will pay for this extended security, with rates substantially higher than current five-year fixes. For example, someone with a 25 per cent deposit will pay 4.3 per cent to fix for 40 years, compared with 1.63 per cent for a five-year fix. The £1,995 product fee is also pretty chunky – on a £50,000 mortgage, this works out as a 4 per cent fee. Admittedly, we are nearer the bottom of the interest rate cycle than the top, and the longer-term direction of base rate is upwards. But as to when that happens and how quickly, is anyone’s guess.
These 40-year fixes are portable so borrowers can take them when they move. However, you still need to meet the lender’s criteria at that point in time – if your situation changes and you aren’t earning what you were, then you may be paying for flexibility that isn’t there because your circumstances have shifted.
If you are considering taking out a fixed-rate mortgage but are not sure how long to fix for, it is worth seeking advice from a broker such as SPF, as we can advise as to what would best suit your circumstances.