Will the 40-year fixed rate mortgage catch on?

Will the 40-year fixed rate mortgage catch on?
Credit: Jason Alden/Bloomberg

Consumers are often encouraged to switch and save, whether it be on broadband, home insurance or their mortgage.

But going against this tide is the ability to fix a rate for up to 40 years.

This month saw Kensington Mortgages launch a range that enables borrowers to fix their rate for the full term, from 11 years up to 40, after a similar launch from Habito in March.

But Mark Harris, chief executive of mortgage broker SPF Private Clients, predicts that such products will have “limited appeal”.

“Most borrowers looking for the security of a fixed rate tend to opt for two or five years because that is the maximum length of time they are happy to commit for,” says Harris.

“Most of us don’t know what we will be doing in 10 years or beyond, and the early repayment charges can run into thousands of pounds if you need to get out of one of these fixes early.”

Corey Whelan, director of Cambridgeshire Money, agrees that such products “will not be for everyone”.

But he adds: “No product out there will be. It absolutely plugs a gap for some customers and I’m already having people interested in this new Kensington release.

“If there wasn’t a demand for this product then we wouldn’t see more lenders entering the marketplace, and Kensington most definitely won’t be the last.”

Perenna, which is applying for a UK banking licence, is also waiting in the wings to offer 30-year fixed rate mortgages.

The prospective lender says early repayment charges will apply to its mortgages but will likely be for a maximum of five years. Doing so will address one of the reasons why most people will not consider a very long-term fixed rate, according to Nick Mendes, mortgage technical manager at broker John Charcol.

Stability versus reality

Adam Wells, mortgage and protection adviser at Lloyd Wells Mortgages, says in his experience, clients like the idea of fixing for longer periods, especially if they are in a family home they intend to live in for the rest of their life.

“But when you start discussing rates of above 2.5 per cent, they then start to understand the benefit of reviewing their mortgage every five years,” he adds.

“Most clients understand that the base rate is at a record low, and they are only likely to increase it going forward. Due to this they are happy to guarantee their mortgage payments with a fixed rate for a certain amount of time, but there has to be a balance between longevity and overall cost.”

Kevin Roberts, director at Legal & General Mortgage Club, likewise says that it seems “hard to imagine a significant uptick in demand for long-term fixed rate products while interest rates are forecast to remain at modest levels.

“Many homeowners will continue to prioritise keeping their monthly repayments to a minimum over longer-term repayment certainty, with the price difference between say a two-year and 10-year mortgage needing to narrow by quite some way for long-term products to cement their place in the mainstream.”