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The rise of the 30 and 40-year fixed-rate mortgage – what borrowers need to know

Nick Cheek
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Nick Cheek

As interest rates continue to stifle borrowers looking to get on the mortgage ladder, more lenders are offering longer term mortgages of up to 50 years. But do borrowers need to beware and what do they need to know before making a (very) long-term commitment?

Last week, new UK lender Perenna announced it was launching long-term fixed rate mortgage of 30 years into the UK market. After the lender secured its full banking license, it noted that it would offer mortgages to those on its 5,000-strong waitlist first and then open to the public later this year.

Long-term fixed rates are popular in the US and Europe but have not had the same cut-through to the UK as short-term and variable rates are more common. Early repayment charges (ERC) and pricing have also been dissuasive factors to take-up.

HSBC go long

Meanwhile, at the end of August, HSBC changed its maximum mortgage term to 40 years for residential and buy-to-let customers. The product is available for direct application (i.e non-broker) from today.

Andrew Matson, head of mortgages at HSBC UK, said: “We know that home ownership is a key life ambition for many people, but affordability can be an issue. We are delighted to introduce our first ever 40-year mortgage term to our customers. This move underscores our commitment to supporting aspiring homeowners in their journey onto the housing ladder.

“By extending the mortgage term, we aim to help make mortgages more manageable with lower monthly repayments and homeownership a reality for our customers.”

Overall, according to Mortgage Brain’s Criteria Brain, maximum mortgage terms range from 35 to 50 years for residential applications, with the majority falling at the 40-year mark. Of the lenders listed, 52 offer a 40-year maximum term, 16 offer 35 years, one offers 50 years and another offers 41 years.

Considerations for taking out 30-40 year mortgages

However, given that the traditional mortgage term is usually between 25 and 30 years, borrowers may well be wary of breaking new ground and stretching out their mortgage term for as many as 25 years more. Ben Thompson, deputy CEO at Mortgage Advice Bureau, highlighted four key points that prospective buyers thinking about opting for a longer-term fix should consider.

1. Consider much further down the line

Even though the lower repayments can be a lifeline during a time when most mortgage repayments have increased, you should think about the future when considering a 30-40 year mortgage – perhaps even more than the present. This is because the length of these types of mortgages could considerably stretch your finances in later life, as you’ll be paying a lot more money due to the additional interest accrued over this period of time. Having the burden of repayments in the future when you’re approaching or in retirement could limit your ability to do other things.

2. Think of your next move

If you’re a first-time buyer, consider how long you might live in that first property for. Many might find themselves buying a two-bed property, but then needing to move again to upsize. As 30-40 year mortgages mean you’ll pay less equity off, you could end up in a situation where the loan is larger than the value of the house – especially in the first years of taking out the mortgage. This might mean it becomes difficult to sell your property and repay the mortgage value.

3. Consider all the options

Deciding which length of mortgage you should opt for shouldn’t be rushed – including 30-40 year mortgages. You should carefully consider how the terms of the mortgage will impact you and which type of mortgage is best. For those looking for ways to lower their repayments when remortgaging, extending the term for a shorter period of time and reverting back could be a good move.

With this in mind, just because your initial mortgage is 30-40 years doesn’t mean you don’t have the option to reduce it in the future. You may want to opt for this longer-term mortgage in order to get on the property ladder, or if your income has remained the same but cannot compete with rising interest rates. However, when your income increases and your monthly payments become more manageable, you could look to reduce this to a shorter term. Conversely, people looking to extend their mortgage term may want to do this in order to lower their monthly payments.

4. Get advice

Speaking to a broker is always worthwhile, as they’ll help you understand the different mortgages and options available to you, and which is most suitable for your needs.