Are 50-year mortgages a good idea?

Speaking to reporters during a trip to Madrid for the Nato summit last week, prime minister Boris Johnson said Downing Street was “certainly” looking at mortgages which could be passed from parents to children.

Reports have since suggested such mortgages could last up to 50 years.

Longer term mortgages are not common in the UK. While a number of lenders now offer 25-year fixes, the maximum fixed term on the market is currently 40 years.

Elsewhere around the globe, however, longer term mortgages are offered as standard, for example, Japan is home to lenders offering fixed mortgage terms as long as 100 years.

It’s hard to see how it could become more than a niche sector.Kate Davies, IMLA

The UK government’s latest considerations follow other ideas, such as how the country could blend renting and owning a property.

Housing shortage

Some brokers have accused the government of ignoring the real problem - the lack of housing supply - while others reckon there is a bigger opportunity in 30-year fixed mortgages, labelling a 50-year term too expensive in the long run.

Director at Harmony Financial Services, Imran Hussain, said: “50-year term mortgages are a cop out from the government when there simply aren’t enough houses being built.

“Which smart person thought, ‘well houses are already 10 times people’s incomes in most cases, but let their kids keep paying the same mortgage in future’?

“The government needs a proper plan to get more houses built rather than putting obstacles in the way and work with builders to encourage proper skilled labour to speed up construction. There should be a proper focus on building affordable housing now more than ever.”

Business groups and councils have warned the UK government it will miss its manifesto target of building an additional 300,000 homes a year by the mid 2020s, calling the target an “unrealistic goal” for English cities.

The government has put planning reforms on hold, despite worries that what is going to be built by the mid-2020s has to have planning permission now, and still does not.

Managing director of Manchester Money, Chris Barker, said 50-year mortgages were “not ideal” but that it could help some people afford a house in the short-term.

“If it means someone can buy their own house and payments are significantly cheaper than renting, then for sure they are a good idea,” he said.

“Although it’s probably being used as a political tool for votes rather for the common good of the general public.”

Founder of brokerage firm Hudson Rose, Graham Taylor, agreed increasing access to credit is “an easy fix” and could have negative repercussions for prospective borrowers in the future. 

“It could ultimately lead to house prices increasing further,” said Taylor.  “The intergenerational mortgage model from Japan has been mooted but we also need to remember that culturally we do not tend to live in intergenerational homes in the UK, so this may have limited appeal."

50-year mortgage 'substantial sum'

Some reckon such a product would not make financial sense for buyers in the long-term. Executive director of the Intermediary Mortgage Lending Association, Kate Davies, said it is hard to see how it could become more than a niche sector.

“If you calculate the total amount repaid for a 50-year mortgage the sums are substantial, and likely to deter would-be homeowners from choosing this option to get on the ladder,” Davies explained.

“There is more potential in the market for 30-year mortgages, which we’re seeing become more attractive in a low-rate environment. But this is only a small jump from the status quo of common 25-year mortgages. In comparison, doubling this 25-year norm to 50 years is a significant change.”

Ultimately, however, Davies said solving the housing supply crisis should come before exploring generational mortgages.

Risk of uncompetitive rates

Some are concerned the rate rising environment could pose a risk to homeowners who take out a 50-year mortgage.

Managing director of Visionary Finance, Hiten Ganatra, said lenders will have to look carefully at how they price the interest rate on a 50-year mortgage.

“If you look back to 2008 when we had the financial crisis, rates prior to the crash were hovering around the 5 per cent mark and were expected to reach the 6 per cent mark if the crash didn’t happen. Then by March 2009, the base rate had dropped to 0.5 per cent, the lowest since the Bank of England was formed in 1994.”

In the UK, prices have historically doubled approximately every 20 years, Ganatra explained.

“By opting for a 50-year mortgage term today on which interest rate may not be as competitive, this could leave you negatively impacted as you begin to build equity in your home.

“Equally as people progress through their careers and income no longer becomes as pivotal in affordability assessments, how will users of this scheme be protected whereby they aren’t stuck on high interest mortgages when they are lowly geared?”

Founder of Highclere Financial, Alan Lakey, said a 50-year mortgage would presumably increase affordability and enable higher lending. 

“Although the five times income limit will have to be raised, otherwise it will be pointless,” he added.

“It will allow many to avoid dearer equity release rates but, unless interest-only rules are relaxed, it may prove not viable as the hoary old problem of affordability creeps back in.”

A government spokesperson said: “We are supporting record numbers of hard-working young people and families on to the housing ladder through a range of flexible home ownership schemes.  

“We will be undertaking the first comprehensive review of the mortgage market for a decade, ensuring even more people have the opportunity to get the keys to their own home.  

“On top of this, we’re also investing £11.5bn to build more of the affordable, quality homes this country needs - including tens of thousands for social rent.”

ruby.hinchliffe@ft.com