A new mortgage that offers borrowers long-term certainty over the size of monthly repayments they will need to make has received a mixed reception from experts.
Yet it may help some first-time buyers get a foot on the property ladder because they are more likely to be allowed to borrow large sums.
Kensington Mortgages, which specialises in lending to those who are rejected by most mainstream banks, has launched a long-term fixed rate mortgage which allows borrowers to fix their payments for the loan's entire life.
This can be anywhere between 11 and 40 years. Rates range from 2.83 per cent to above 4 per cent for those willing to fix for the 40-year term.
Building for the future: The new mortgage from Kensington, which offers terms of up to 40 years, may help some first-time buyers get a foot on the property ladder
The 'flexi fixed for term' loan, foreshadowed in The Mail on Sunday last week, has been welcomed by Treasury Minister John Glen who says it provides borrowers with 'more options' – particularly for those 'who value 2.83 per cent to above 4 per cent for those willing to fix for the 40-year term.
Governments, past and present, have long called for lenders to offer such long-term fixed rate loans.
Its launch is aptly timed. It comes as borrowers expect mortgage rates to hike up in response to an increase in Bank Base Rate which could come as early as next month.
Also, with inflation heading for 5 per cent, many homeowners are looking to fix the interest rate on their mortgages so that they can control their biggest monthly household bill.
Yet scepticism rules among some mortgage experts.
'Long-term fixed rate home loans are not a new innovation,' says David Hollingworth of broker L&C Mortgages, 'and they have tended not to capture the imagination of borrowers in great numbers.'
He says this is because rates available on longer-term fixed rate deals are inevitably higher than to be found on popular shorter fixes of two or five years.
This persuades many borrowers to opt for the immediate benefit of a cheaper shorter-term fix over the potential long-term benefit of an extended one.
Beware early repayment charges
Onerous early redemption charges, adds Hollingworth, can also make long-term fixed rate deals unappealing, although he admits lenders are launching products with more friendly terms and conditions.
For example Habito, which launched a 40-year fixed rate loan in spring this year, does not impose early redemption penalties on its long-term loans.
More generous lending criteria on long-term mortgages could help first-time buyers who are struggling to save up enough to get a foot on the property ladder, according to experts
Kensington will not apply such a charge unless a borrower decides to remortgage to another lender.
Then the fee could be as high as 7 per cent of the outstanding loan. It will also not impose a charge if a borrower moves home or pays off the entire loan from the home's sale.
Kensington boss Mark Arnold believes the new loans could provide an opportunity for some first-time buyers to get a foot on the property ladder 'who otherwise would be excluded'.
It is a view shared by Ray Boulger, senior mortgage technical manager at John Charcol.
He says a mix of generous lending criteria – the ability to borrow six times annual salary, 95 per cent loan-to-value mortgages and affordability based on the fixed interest rate, not a higher standard variable rate – could 'make all the difference' as to whether first-time buyers can purchase a property.
Nationwide research showed house prices were rising faster than first-time buyer earnings
Last week, research from Nationwide Building Society indicated that affordability remains an acute problem for many wannabe first-time buyers as a result of house prices rising more quickly than average earnings.
The society's UK First Time Buyer house price to earnings ratio now stands at a record level – exceeding its previous high in 2007 – and confirms that finding a deposit is a 'significant challenge' for prospective first-time buyers.
How the payment numbers stack up
A long-term fixed rate mortgage – ten years or more – will provide payment certainty. But it may not necessarily be in the best financial interests of borrowers, depending on where mortgage rates go from here.
As a rule of thumb, if rates rise sharply, a long-term borrower will be quids in. But if interest rate rises are more gentle, then a better strategy may be to take out shorter fixed rate loans and then keep remortgaging.
Last week, we asked Peter Gettins, of L&C Mortgages, to do some number crunching.
The results are hypothetical – who knows where interest rates will be in ten years' time, let alone 40 – but interesting nonetheless.
First we asked him to calculate the total cost of a 40-year fixed rate repayment loan of £195,000 from Kensington.
Assuming a loan-to-value of 95 per cent, the fixed rate would be priced at 4.16 per cent and carry an arrangement fee of £1,499.
Then we got him to calculate the total cost of the same sized loan over the same term, but assuming a borrower decided to gamble a little and take out a new fixed rate every five years – so in effect, remortgaging seven times.
The starting fixed rate is 2.84 per cent (a deal Skipton Building Society currently offers, with an arrangement fee of £495). In an environment where interest rates rise – especially during the first five years – the 40-year fix works out cheaper.
So, assuming fixed rates were to rise in price by a) 1 per cent every five years; b) rise by 3 per cent in the first five years, then 0.5 per cent higher every five years thereafter; or c) rise by 3 per cent in the first five years – flat thereafter – the total mortgage costs (inclusive of arrangement fees) over the loan's life would work out as follows: a) £475,653; b) £526,032; and c) £469,901. These figures are all higher than the £402,055 total cost of the Kensington loan.
Only when we do the number crunching for a scenario where mortgage rates stay flat for 15 years, then increase by 1 per cent every five years, is the shorter-term fix option cheaper (total costs over the loan's life of £386,234).
The same picture is repeated if the £195,000 loan is taken out over 30 years – at a fixed rate of 3.77 per cent. Long-term fixing proves cheaper in three of the four scenarios.
Of course, if a borrower takes out the £195,000 loan over 25 years and re-fixes every five years, this will prove a cheaper option overall than paying back the same loan over 40 years at a fixed rate of 4.16 per cent – irrespective of which of the four interest rate scenarios is used.
Those on the 40-year term loan will pay less per month, but they will have to keep paying for an additional 15 years.