A 50-year home loan might seem depressing to some, but maybe not if the alternative is never being able to buy a property. Long-term fixed-rate mortgages are an emerging financial product that should in theory enable first-time buyers whose price is currently off the market to move up the housing ladder.
By spreading the repayments over a longer period – the average mortgage contracted this year is 29 years – buyers should be able to borrow up to eight times their income, rather than the current average of 3.2 times, estimate potential suppliers. The loans would be secured by borrowing from pension funds and insurance companies rather than less stable consumer deposits, to meet the Bank of England’s prudential requirements.
A long-term fixed rate mortgage could allow a household with an annual income of £50,000 to borrow £400,000 instead of around £150,000, and so unlock the bond that many tenants find themselves in where they cannot get a mortgage on the property they live in despite paying less than rent.
It is an attempt to solve a serious problem. Last year, full-time employees in England could generally expect to spend around 9.1 times their annual earnings in the workplace to buy a house; an increase from 7.9 times earnings in 2020, according to the Office for National Statistics.
Perenna, a new company awaiting licensing, plans to offer long-term loans. Its co-founder, Colin Bell, said: “Long term fixed rate loans are really appealing to first-time buyers. One of the reasons they can’t get on the ladder is that they don’t meet the affordability criteria that should rightly take into account rising interest rates. They can get a mortgage, but it’s a small loan.
He said that as it stands, lenders can only make 15% of their loans at a loan-to-income ratio above 4.5. The Bank of England is expected to increase this amount for long-term fixed rate mortgages to make this an option for more first-time buyers.
Fifty-year mortgages and other long-term mortgages would be transferable to other properties and, unlike conventional mortgages, could be bequeathed with property after death, he said, although inheritance tax could be payable.
There are risks for consumers, said Nicholas Mendes, technical director of mortgages at John Charcol, a mortgage broker. “The longer term fixed rate could be more expensive during the fixed rate period,” he said.
UK Finance, the trade body for the banking and finance industry, said the benefits included lower monthly payments and certainty of interest due. Disadvantages included paying more long-term interest and building up equity more slowly, and the term of the mortgage being likely to run into a customer’s retirement. He also said breakage fees could be higher.
Some worry that initiatives such as long-term fixed-rate mortgages could be undermined by a lack of political will to accelerate housing construction, which could do more to solve the affordability crisis. Around 340,000 new homes are needed each year in England, according to one estimate, compared to 216,000 built in 2019-20, the last year for which full figures are available.
“The government appears to be backing away from its commitment to build more homes,” said Paula Higgins, chief executive of the Homeowners Alliance. “They’re looking to stimulate demand through things like extending the right to buy [to affordable housing tenants]. But the reality is that average incomes and average house prices are slipping away, and we won’t be able to follow in our parents’ footsteps, when teachers and doctors were able to buy their own homes.
The impact of falling homeownership rates has been socially significant. If the homeownership rate returned to the level of the early 2000s, 1.4 million additional families would now own their homes. The political price for a government that can restore this balance is considerable, but achieving it when house prices are increasing by 10.5% per year remains extremely difficult.