Can it ever pay off to fix your mortgage for 40 YEARS?
A new mortgage, which offers borrowers long-term security over the amount of the monthly repayments, was received by experts mixed.
Still, it can help some first-time buyers get one foot on the real estate ladder as they are more likely to be able to raise large sums of money. Kensington Mortgages, which specializes in lending to those who are rejected by most mainstream banks, has launched a long-term fixed-rate mortgage that allows borrowers to set their payments for the life of the loan.
This can be anywhere from 11 to 40 years. The rates range from 2.83 percent to over 4 percent for those willing to agree to a 40 year term.
Building for the Future: The new mortgage can help some first-time buyers get one foot on the real estate ladder
The “flexi-term” loan, hinted at in The Mail last Sunday, was welcomed by Treasury Secretary John Glen, who says it gives borrowers “more options” – especially those who are “2.83 percent to over 4 percent estimate “. Cent for those who are ready to fix themselves for the 40-year term. The “flexi-term” loan, hinted at in The Mail last Sunday, was welcomed by Treasury Secretary John Glen, who says it gives borrowers “more options” – especially those “who have the security of their repayments through one estimate a longer period ”. Period of time’.
Past and present governments have long encouraged lenders to offer such long-term fixed rate loans.
Its start is timely. Borrowers expect mortgage rates to rise in response to a bank rate hike that could come as early as next month.
Additionally, with inflation at 5 percent, many homeowners want to set the interest rate on their mortgages so they can control their largest monthly household bill.
But some mortgage experts are skeptical.
“Long-term fixed rate home loans are not a new innovation,” says David Hollingworth of broker L&C Mortgages, “and they haven’t caught the imagination of borrowers in great numbers.”
He says this is because the rates available on longer-term fixed-rate contracts are inevitably higher than popular shorter terms of two or five years. This convinces many borrowers to opt for the immediate benefit of a cheaper short-term rate over the potential long-term benefit of a longer one.
Onerous early repayment fees, Hollingworth adds, can also make long-term fixed-rate deals unattractive, though he admits that lenders bring products to market on more favorable terms. Habito, for example, which launched a 40-year fixed-rate loan earlier this year, does not impose any prepayment penalties on its long-term loans.
Kensington will not charge such a fee unless a borrower decides to reschedule to another lender. Then the fee could be up to 7 percent of the outstanding loan. Also, there is no fee charged if a borrower moves or pays off all of the loan from the sale of the home.
Kensington boss Mark Arnold believes the new loans could give some first-time buyers the opportunity to get a foot on the property ladder “who would otherwise be excluded”.
That view is shared by Ray Boulger, Senior Technical Manager, Mortgage at John Charcol. He says a mix of generous lending criteria – the ability to borrow six times annual wages, 95 percent lending value mortgages, and affordability based on a fixed rate, not a higher standard variable rate – could “make all the difference”. whether first-time buyers can purchase a property.
Last week, research by the Nationwide Building Society showed that affordability remains an acute concern for many would-be first-time buyers as house prices rise faster than average incomes.
The UK society’s price / earnings ratio for first time buyers is now at a record high – above its previous high in 2007 – confirming that finding a deposit is “a significant challenge” for potential first time buyers.
HOW THE PAYMENT FIGURES BUILD UP
A long-term fixed-rate mortgage – ten years or more – offers payment security. However, this may not necessarily be in the best financial interests of the borrower, depending on where the mortgage interest rates come from.
As a rule of thumb, if interest rates rise sharply, a long-term borrower will make money. However, if the rate hikes are gentler, a better strategy may be to take out shorter fixed-rate loans and then continue to borrow.
Last week we asked Peter Gettins at L&C Mortgages to collect some numbers. The results are hypothetical – who knows where interest rates will be in ten, let alone 40 years – but interesting nonetheless.
First we asked him to calculate the total cost of a 40 year fixed rate loan of £ 195,000 from Kensington. Assuming a LTV of 95 percent, the fixed rate would be set at 4.16 percent and an administration fee of £ 1,499.
Then we got him to work out the total cost of a loan of the same size over the same term, but let’s say a borrower decides to gamble and take out a new fixed rate every five years – that is, reschedule seven times. The starting fixed price is 2.84 percent (an offer the Skipton Building Society is currently making with a finder fee of £ 495). In an environment of rising interest rates – especially in the first five years – the 40-year term is cheaper.
Assuming that the prices of the fixed interest rates would increase by a) every five years by 1 percent; b) increase by 3 percent in the first five years, thereafter by 0.5 percent higher every five years; or c) a 3% increase in the first five years – a flat rate thereafter – the total mortgage costs (including agency fees) over the life of the loan would be: a) £ 475,653; b) £ 526,032; and c) £ 469,901. These numbers are all more than the total cost of £ 402,055 for the Kensington loan.
Only when we calculate the numbers for a scenario where mortgage rates stay the same for 15 years and then increase 1 percent every five years is the shorter-term fixed option cheaper (total cost over the life of the loan of £ 386,234).
The same picture repeats itself when borrowing £ 195,000 over 30 years – at a fixed rate of 3.77 percent. The long-term fixing turns out to be more favorable in three of the four scenarios.
Obviously, if a borrower takes out the £ 195,000 loan over 25 years and reschedules it every five years, this is an overall cheaper option than repaying the same loan over 40 years at a fixed rate of 4.16 percent – regardless of which of the four Interest rate scenarios is used.
Those who get the 40 year term loan will pay less per month but will have to pay an additional 15 years.
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