All About the New Long-Term Fixed Rate Mortgages
During the last decade or so, the property market has been booming. Even Brexit and lockdowns could not curb it, whilst most other markets were severely affected. House prices are now at an all-time high. This scenario, however, is about to change, according to Savills. They predict that house prices will fall by 1% in 2023, with a slow period of growth following that for the next few years. There are several reasons for this prediction. For one, there has been a fall in demand. In addition, mortgages are expensive, and there are continuing problems in the construction industry. And not only that, but next year, the government’s Help-to-Buy scheme is coming to an end. House prices have been rising since 2007 because of a drastic mismatch between supply and demand. While the demand has been extremely high, a scarcity of homes has driven the prices up and up. And the government’s “Stamp Duty Holiday”, which was introduced during covid merely to support the housing market, unexpectedly caused it to explode. So why has the demand now dropped? To blame is the cost of living crisis, which is seeing energy bills skyrocket, and rising interest rates, as well as an increase in mortgage costs.
Enter 30 and 50-year mortgages
People are desperate to get on the housing ladder; these days, it is more difficult than ever and is seen as a significant achievement. To make this major milestone in life more accessible, the answer has been suggested to lie in longer than the standard 25-year mortgage; from 30 and even up to 50 years. Before his resignation, Boris Johnson stated that this is all part of an effort to find “creative ways to help people into ownership.” With the looming cost of living crisis and more and more people living on a shoestring budget, they need to know what their mortgage repayments are each month.
Perenna is a new lender on the market, and they are poised to offer 30-year fixed-rate mortgages, eventually possibly extending to 50 years, to help people buy a home who would otherwise not be able to. At present, Perenna has received a banking license with restrictions, and they will be able to start trading once they have confirmed their banking infrastructure and their restrictions have been lifted.
Arjan Verbeek is chief executive of Perenna, and he has stated that “The UK financial infrastructure requires significant innovation to get growth back and reduce inequality….Perenna will be the blueprint to deliver this, for mortgages as well as small businesses and infrastructure.” Perenna will thus be able to help people with buying their first homes and also with moving home.
Perenna’s rates will probably be around 4-4.5%. And there will be no need to save for a deposit, as to fund the mortgages, Perenna is going to issue covered bonds, which will be secured against borrowers’ homes, on the London Stock Exchange.
In the United States, every lender has been offering 30-year mortgages for decades, and today it is the most popular mortgage, with around 90% of home buyers opting for it.
Is this really the solution though?
Although long-term mortgages appear to offer a solution to many, they have been heavily criticised. Many believe that the answer to the housing crisis is to increase supply by building more new homes, thus causing property prices to drop. It is thought that the new 30 and 50-year mortgages will only worsen the financial crisis over the long term, with this debt inevitably being passed on to the next generation. Are these long-term mortgages really the answer, or could they lead to a housing market crash? Stagnation rather than growth? The problem with 50-year mortgages in particular, is that people will find themselves unable to move, as it will take decades for equity to accrue, and the debt will just remain high as the bulk of repayments will be towards the interest. And obviously, stretching out a loan over a more extended period of time will drastically increase the amount that is borrowed.
A long-term fixed-rate mortgage removes any doubts and uncertainties over increasing rates, inflation and the state of the economy; you know exactly what you will be paying each month, and it will never change. Long-term mortgages are especially good for young first-time buyers, who will enjoy the lower monthly repayments as the amount borrowed is spread over a longer period. This is essential as house prices are currently so high. In addition, a long-term mortgage gives far more people a chance to get onto the property ladder; first-time buyers are obviously seen as a risky proposition, but with long-term fixed-rate mortgages, this barrier is removed, and they are much more likely to get accepted.
Until these much-needed new homes are built, house prices are going to remain too high for the average homebuyer to afford. The new 30 and 50-year mortgages are a short-term way of overcoming this and keeping the housing market thriving.