There’s definitely not one size fits all when it comes to mortgages. Not all borrowers are the same. But for some, long-term fixed-rate mortgages may be the best solution to help them onto the property ladder, or just gain some much-needed financial security.
So, is this why the popularity of long-term fixed-rate mortgages in the UK is growing? With new and existing lenders starting to offer long-term fixed products for the life of the mortgage, we take a closer look.
Although these products might mean fewer remortgaging opportunities for brokers, if it’s in the best interests of clients, they should be considered. Read on to get a better understanding of the pros and cons.
Firstly, there can be some confusion around long-term mortgages versus long-term fixed-rate mortgages. Let’s try and clear that up so you can give your clients a good understanding of what’s right for them.
What’s the difference?
Long-term mortgages are taken out for a longer term than the usual 25 years and could be a variable rate, tracker or offset mortgage. They could also start at a special introductory rate that moves to a variable rate later.
With a long-term fixed-rate mortgage, the rate is fixed for the whole of that term, anything up to 50 years. That means there would be no need to remortgage and the client would have the same monthly payment throughout the life of the mortgage.
In this blog, we’ll focus on long-term fixed-rate products, highlighting the main points so that you can provide clients with the key information they need to make an informed choice.
These types of mortgages have been popular in Europe with borrowers in France enjoying protection from higher rates with mortgage terms of 23 years on average. In Germany, fixed-rate terms of 10 to 20 years are the most popular. And in Belgium over 92% of mortgages are fixed for over 10 years[1].
Who do they suit?
The good news is they suit most people. Of course, it’s down to personal preference, but a client looking for stability and predictability over the long run rather than ‘chasing the rate’ could benefit.
First-time buyers who are struggling to get on the property market may find these types of mortgages give them more borrowing power. As the Bank of England says “Long-term fixed-rate mortgages (five years or more) are not covered by the mortgage affordability rules, meaning that lenders do not need to stress test these borrowers. The FPC (Financial Policy Committee) noted that this could make long-term fixed rates more attractive to borrowers.
And for many borrowers coming off low-interest mortgages, the prospect of being able to secure long-term fixed-rate mortgages to reduce monthly payments is enticing.
However, that could also mean more interest to pay over the term, something that might not occur to the client so they must be made aware. For example, borrowers opting for 40-year terms could find themselves paying an extra £63,000 in interest, compared to taking a 25-year deal[2].
A note of caution too. These long-term deals could see clients still paying off their mortgages well into their retirement.
How long is long-term?
Long-term fixed-rate periods are now available for up to 50 years as lenders were granted licenses to offer this since August 2022[3].
In the last 18 months, we’ve seen existing lenders like Kensington Mortgages and Habito enter this market.
Meanwhile, new lender Perenna has entered the market offering terms of up to 40 years and lending up to six times a borrower’s income, subject to criteria, which could act as a significant boost for many first-time buyers.
Perenna aims its products at first-time buyers, those remortgaging who are looking for stability, and later-life borrowers wanting to release some equity. In a recent podcast, Perenna CEO Arjan Verbeek explained how his company differs from other UK lenders. Perenna adopt a more European style by issuing bonds to pension funds, insurance companies, and asset managers as opposed to taking deposits to fund mortgages.
Interestingly, our criteria sourcing tool, Criteria Brain, shows that for the last three months, 75% of mortgage advisers using the multi-search function have searched a 40-year term as part of the Maximum Term (years) criteria. Way ahead of any other term.
In the last 18 months, we’ve seen existing lenders like Kensington Mortgages and Habito enter this market.
What your clients should know
As with all products, there are pros and cons for your clients to consider. Let’s start with the key benefits of a long-term fixed-rate product.
Predictable monthly payments
One of the primary advantages is predictability. With the interest rate fixed for an extended period, your clients can budget more effectively since monthly mortgage payments won’t fluctuate with interest rate changes.
Protection against rate increases
Long-term fixed mortgages shield borrowers from the impact of rising interest rates and inflation like that we’ve experienced over the last 12 months. If interest rates rise significantly during the fixed term, your clients will still be paying the rate they secured at the outset which could result in savings over time, compared to variable/short-term fixed rates. Peace of mind in times of economic uncertainty.
Planning for the long-term
If your client intends to stay in their property for an extended period, a long-term fixed-rate mortgage aligns with their long-term plans. They won’t have to worry about refinancing or adjusting to higher interest rates in future.
Potential to borrow more
The possibility to borrow larger multiples of income on long-term fixed-rate mortgages gives first-time buyers more chance of securing the funds they need to buy a property, especially in areas like London and the Southeast where prices are higher. Stress testing on these products isn’t as stringent as on short-term or variable rates.
Easier financial management
Knowing that their mortgage rate won’t change allows your client more precise financial planning and stability. They can allocate resources more efficiently, whether it’s for saving, investing, or other financial goals.
Ideal for first-time buyers
First-time buyers often find comfort in the stability offered by long-term fixed-rate mortgages. We all know how challenging it can be to predict how financial situations will evolve over the years.
Less frequent remortgaging
Long-term fixed-rate mortgages reduce the need for frequent remortgaging, saving your client time, money, paperwork, and the hassle of finding a new mortgage deal every few years, with possible changes to criteria and affordability to worry about.
Things to consider
Slightly higher initial rates
Long-term fixed-rate mortgages typically have a slightly higher interest rate than shorter-term fixed or variable-rate mortgages, although factors such as the size of deposit and LTV may result in a lower or higher rate. Long-term fixed rates come with predictability, peace of mind, and security, which for some borrowers will be worth the extra cost. It all comes down to what suits your client best and what they’re trying to achieve.
Overpayments
Your client must be aware of whether the product lets them make overpayments should they wish to. Currently, most long-term fixed-rate mortgages do not allow this.
Early repayment charges
Some long-term fixed-rate mortgages come with early repayment charges. If your client wants to pay off the mortgage or switch to another deal before the fixed term ends, they must understand the terms and conditions of their mortgage.
Personal financial situation
Long-term fixed-rate mortgages may not be suitable for everyone. With your help, clients should consider their personal financial situation and how well this type of mortgage aligns with their long-term goals.
Use the right technology
Long-term fixed-rate mortgages offer stability, predictability, and protection against rising interest rates and inflation. They are particularly appealing to those who value financial security and plan to stay in their homes for an extended period.
However, it’s essential you and your clients carefully assess their financial situation and long-term objectives before committing to a long-term fixed-rate mortgage.
You can quickly search the market to source such mortgages with Mortgage Brain products. Sourcing Brain and Criteria Brain reduce the amount of time you need to spend scouring the market for the perfect product.
Take a 30-day free trial today and try it for yourself.
Every case is different, more so these days, and long-term fixed-rate mortgages of 30-40 years are not right for everyone. However, we are quickly seeing the European demand for such products spreading to the UK as borrowers try to get to grips with inflation and interest rates. Hopefully, you are now armed with all the information you need to recommend these products if they are right for your clients.
