40-Year Fixed-Rate Mortgages Raise Questions and Concerns


Mortgages with repayment periods that span several decades have traditionally been the preferred option for most borrowers. Being able to spread the costs over an extensive period of time is the only realistic entry point to the housing market for the vast majority of buyers.

The introduction of a new 40-year mortgage product by Kensington Mortgages has understandably caught the eye of an extensive audience of prospective applicants. Particularly given how this particular product is a 40-year fixed-rate deal.

Typically, fixed-rate deals are rarely available beyond the traditional two-year or five-year fixed-rate loan. Many lenders have introduced 10-year fixed-rate products, but a mortgage with a fixed rate for 40 years is practically unheard of.

“A [longer] fixed-for-term mortgage, already very popular in some parts of continental Europe, is likely to become increasingly attractive in a rate-rising environment,” said Mark Arnold, chief executive of Kensington Mortgages.

While the appeal of such a product is clear, many brokers and independent advisors have their doubts. A 40-year fixed-rate term could pave the way for affordable monthly repayments, but there are potential downsides applicants must take into account.

Capitalising on record-low mortgage rates

The UK’s real estate sector has been a hive of activity as of late, as millions aim to take advantage of interest rates at historic lows. Some of the most competitive deals of all have taken the form of two-year and five-year fixed-rate deals, some of which have an initial APR of less than 1%.

But the only reason banks and lenders have been willing to offer such low-interest rates is that they are strictly temporary. After the initial two-, five-, or 10-year period, they can be adjusted as the lender sees fit.

With a 40-year fixed-rate deal, this is not an option. The APR agreed upon at the time the loan is taken out will remain fixed for the life of the mortgage, irrespective of what happens with Bank of England base rates.

This is where those tying themselves into such long-term fixed-rate deals need to exercise caution. Even if the rate agreed on the loan is competitive at first, it could become quite the opposite in years and decades to come.

All terms and conditions attached to the loan will also remain fixed for the entire 40-year period.

The benefits of early repayment

Another concern raised by experts is the potential for longer-term mortgages to discourage home buyers from potentially repaying their mortgages at an early date. Often unaware of the fact that doing so could pave the way for significant savings while ensuring lower costs of living upon reaching retirement,

“The rise of mortgages with ultra-long terms that stretch way past retirement age is worrying. It requires a fundamental rethink of what people will need in retirement and could require a change to the assumptions that underpin current guidance for pension savers on how much they should aim to have in their pot,” said Becky O’Connor, head of pensions and savings at Interactive Investor.

“If you are considering paying a mortgage into retirement, there’s a huge reality check coming: you will need a much bigger pension than most people are currently on track for to finance this additional borrowing.”