The push towards long-term fixed-rate mortgages seems to be gathering a small amount of pace, with the launch of Habito’s 40-year fixed-rate mortgage.
Clearly, as a lender it is also attempting to address some of the major concerns that have been levelled at such products, not least around ERC tie-ins and exit fees – these products don’t have any – although there is a £1,995 product fee and this would also need to be paid again should the borrower want to take out any additional borrowing.
I think it’s understandable why these products exist, particularly for first-time buyers – for example, a 40-year term might well allow them to get over any affordability barriers that might be there for them on a more traditional 25-year term. And it may be cheaper for them – in terms of monthly mortgage payment – if they are spreading the payments over a longer term.
Certainly they might be willing to live with the thought of paying off a mortgage over such a long-term if it means they can get on the property ladder far quicker. Especially if they are currently not meeting the affordability assessment of lenders offering more traditional terms.
Plus, of course there is the very sound argument that a 40-year term isn’t likely to be the one that the first-timer actually ‘lives’ with during their mortgage journey. Equity growth will probably allow them to get the LTV down on their property, add in income rises over the years, and there is a very good chance that a mortgage term can be reduced to more ‘normal’ levels. I get that.
Indeed, I’ve heard it said many times before, that in the UK housing market, the longer you wait to get on the ladder, the more difficult it will be, and the more you will end up paying over the long-term. Perhaps this, and other products like it, do allow first-timers specifically to jump on the ladder far more quickly than they would otherwise be able to do so.
However, and here is perhaps the rub when it comes to such products, the ‘high LTV’ on this product is 90%. This is not a product that is pre-empting the 95% LTV products we will see from next month, and part of me can’t help thinking that if you have the 10% deposit already, why wouldn’t you opt for a more competitive rate over a more normal 25-year term?
Let’s put this into perspective, if you want a 90% LTV Habito mortgage over a 40-year term, you will be paying 5.35% in interest. A quick look on the best buy tables shows that a first-time buyer with £25k deposit, buying a £250k property, can currently get a 3.09% fixed-rate on a two-year deal, providing of course they can meet the financial criteira, etc. I’m fully aware also that advisers may well be able to secure a better rate than that.
Let’s do the maths. The two-year rate over 25 years gives you a monthly mortgage payment of £1,077; the Habito 40-year offering would mean the borrower ends up paying £1,140 per month. If you can make it through the affordability criteria and assessment then, which deal would seem to be the better one for your first-time buyer client? A lot of course depends on what you think interest rates will do in the next five years, or so.
This is not meant to disparage the Habito offering – far from it. It, like any other lender, has to price for risk and over time those rates for longer-terms may well come down. Indeed, depending on what rates due in general, over such a long period those current rates might also look good.
And, of course, it’s good to see a relatively new lender coming to the market with new products. As always though it once again shows the importance of advice because, I have no doubt, that for certain customers this will be a good option, but only once an adviser has got their hands on the client and their wants, needs and financials, will that become clear.
Rates matter, especially in a part of the market – 90% LTV – which has seen a growing number of products being launched/relaunched in recent weeks. Last week, for example, the West Brom have launched a 90% LTV five-year fixed-rate at 3.64% with no completion fee and £500 cashback. How does that stack up to 5.35%?
So, while the market undoubtedly will benefit from the introduction of a greater number of products in the higher LTV space, long-term fixed-rate lenders will have to continue to address questions about their relevance and demand, perhaps not so much in terms of charges and fees, but definitely still on the initial price.
Patrick Bamford is business development director at AmTrust Mortgage & Credit