The 40-year fixed-rate mortgage is the latest product from a lending industry adapting to the changing UK housing market. They’re now available for the first time in the UK, giving borrowers another option in the journey towards the property ladder.
Some lenders are already singing their praises, presenting the new type of deal as a flexible option for cautious buyers. However, others warn that buyers must know exactly what they’re getting involved with before locking into a 40-year fixed-rate mortgage. In truth, understanding its ins and outs gives you the best tools to decide whether such a loan is right for you.
What Is a 40-Year Fixed-Rate Mortgage?
As we know, mortgages let people loan money to buy property. What’s new about this type of deal, then, is its 40-year term and fixed interest rate. A mortgage term refers to the deal’s lifespan or the amount of time you’re scheduled to pay back your loan and pay off the house.
A mortgage interest rate refers to the extra money borrowers pay to the bank during the mortgage term, charged at a percentage of the remaining debt. Therefore, borrowers taking out a 40-year fixed-term mortgage agree to pay back a loan at an unchanging interest rate for the next 40 years.
Why Are They So New To The UK?
With the housing market pricier than ever and the cost of living stagnating, lenders are changing the way they offer mortgages to suit the financial climate. A 20-year mortgage term used to be the standard, but 30-year terms are rapidly overtaking them. Lengthier mortgage terms can benefit borrowers and lenders alike, reducing monthly payments and increasing the accumulative interest paid.
This trend coincided with historic lows in interest rates, as the government incentivises spending to kick-start the economy. The prospect of paralleling this historic low with a similarly low-interest rate over such a long term proves more than enough to catch some lenders’ eyes.
What’s Different About a 40-Year Fixed-Rate Mortgage?
The sheer length of the mortgage lifespan brings extra challenges to the table. Lenders are already warning that borrowers can’t be more than 75 years old when the term ends, ruling anyone over 35 out of the equation.
These types of long-term loans also come with steep penalties for leaving the mortgage early. However, they include certain loopholes for significant life events like moving house, losing your job, severe illness, and even death.
Four Upsides of a 40-Year Fixed-Rate Mortgage
1. You can get on the property ladder with a smaller deposit
Lenders are already offering 40-year fixed-rate mortgages at a 95% loan to value, meaning that you could move into a house worth twenty times your deposit. This can help people who don’t have a big lump sum in the bank move into a new home.
2. You can access deals with lower monthly repayments
These long-term deals spread the debt burden thinner than other mortgages, meaning you may have to pay less per month than other arrangements. This lower monthly outgoing is obviously inviting to many borrowers, although it does mean you build up equity in your home far slower than on shorter-term deals.
3. You protect yourself from increasing interest rates
The fixed-rate mortgage’s main upside is capitalising on the current low-interest rates, which protects you from future interest hikes that may affect the mortgage rates on offer.
4. Less hassle, more security and peace of mind
Many mortgages feature a window of fixed-rate repayment, between 1 and 6 years. Borrowers must renegotiate their terms based on new circumstances or default to a potentially more expensive standard rate when the window closes. A 40-year fixed-rate mortgage removes this worry entirely.
Four Downsides of a 40 Year Fixed-Rate Mortgage
1. It’s a massive commitment
Clearly, 40 years is a huge chunk of life, and you’ll be nearing retirement age by the time a 40-year mortgage ends. Debt and repayments put a significant strain on retirees, so you’ll have to think very hard about your pension finances if you decide to take out a long term deal.
2. You could miss out on other deals
While interests are currently at a historic low, you never know if they could fall further down the line, undermining the savings from a fixed-term contract. A 40-year fixed-term mortgage could also obstruct deals due to the slow build-up of equity.
3. Your equity increases very slowly
Slow payments and high loan to value ratios mean it takes years, or even decades, to build up equity on your property. Homeowners leverage their equity to get better deals on their new places, so longer-term, slower equity mortgages could mean you miss out.
4. You’ll have to pay a lot of interest
Borrowers pay interest rates over time, and 40 years is a lot of time. Borrowers in 40-year mortgages, therefore, pay lenders higher sums in accumulative interest, which is part of the reason lenders have started offering them.
As you can see, mortgages like these bring a wide range of pros and cons. Before deciding, it’s best to seek professional advice from a mortgage broker to ensure you make the best choice based on your personal situation.