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What do long-term mortgages mean for the UK housing market?




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What do you think of the idea of ​​locking a mortgage for 40 years?

This is the innovation that one mortgage lender is currently offering to UK borrowers.

And you may not like the idea, but it tells us where we are in interest rates, inflation, the housing cycle…

Long-term fixed mortgage loans are becoming popular.

Kensington Mortgages offers mortgages with fixed interest rates from 11 to 40 years. The interest rate you receive depends on the assets of the home (or the deposit if you are a new buyer) and the length of the loan.

For example, for a 60% value loan (i.e. minimum 40% deposit), you can get an interest rate of 2.83% for 15 years or 2.9% for 30 years. For those with a deposit of only 5%, the 30-year maturity is 3.77%. That means you don’t have to “stress-test” your loan to raise rates because interest rates are fixed, which means you should be able to borrow more, Kensington says.

Mortgages can travel with you and allow 10% overpayment per year.

I’m not judging this as an individual product (need to see more fine print for comparison, you can get a 10-year repair for about 2% right now). But I’m interested in the overall concept.

why? In the UK, we are used to the mortgage market where we have to think about what will happen to interest rates when we get a loan.

A few years ago there was a memorable guest post in Money Morning by the author who compared the UK mortgage market to spread betting on interest rates. To some extent this is true.

When you receive a mortgage at a floating rate, you are technically placing a heavily leveraged bet on the direction of the interest rate. (The only real difference is that you almost certainly don’t take margin calls. This only slightly reduces your risk.)

When interest rates go down, mortgages go down and you win. When interest rates rise, mortgage costs rise and you lose money. If rates go up high enough, you could end up losing your home. Of course, you tend to find (though not always) that a variable rate mortgage is the cheapest mortgage at the point of sale because you take all the interest rate risk.

If the interest rate is fixed for an extended period of time, the cost of the loan increases (eg, a five-year fixed rate is higher than a two-year fixed rate). This is because the longer they lock, the more interest rate risk is passed on to the lender.

Even with a fixed loan, there are very real risks in the form of “refinance” risk. Let’s say you took out a five-year fixed mortgage loan three years ago. You still have two years to get the loan. Interest rates are good and cheap. Probably not as cheap as you could have, but still less than 2%.

Good idea but interesting timing

But what about interest rates two years from now? Inflation is rising strongly and the Bank of England continues to hint that a rate hike may come (or Governor Andrew Bailey feels very defensive about it right now).

So when you refinance, you can worry that you won’t be able to “roll over” the loan on the same terms. Looking at the current fix, you might wonder if you’ll have to pay the fines needed to fix and fix the problem for a longer period of time.

(Obviously, I don’t have a strong view on this particular question, just in case you’re curious. I think inflation will go up and interest rates will come down significantly, but I don’t know exactly what this will specifically mean for mortgage rates over the next two years. (Year is a crystal ball thing).

From this perspective, it’s not bad to have the option to lock the interest rate for the entire term of the mortgage.

When the homebuyer is the one who bears the interest rate risk, the worst-case scenario outcome is the loss of the home. In terms of life events that do not include death, it is disastrous.

Lenders should be much better equipped to measure and manage interest rate risk. In that sense, this is a welcome innovation. It can also help make the housing market somewhat less cyclical (i.e. prone to booms and busts), but it’s by no means completely off the table in any market.

There are also pension fund groups of people who need to match their debt. They are looking for a fixed income product (loan) that will provide a guaranteed (or near guaranteed) income to match the amount owed to pensioners in the future. So, this means that the companies that offer these long-term mortgages need to be funded.

What’s interesting here is the timing.

The 40-Year Correction Program was launched just when the market turned and interest rates were expected to rise. On the one hand, this presents a good return for a capable lender (the first few years of these loans will actually be quite lucrative at current rates). On the other hand, fixing that ratio can have a significant impact on the future direction of interest rates and inflation.

There is also the fact that there is a demand for these loans in the first place. Admittedly, if you have to pay off a 40-year mortgage to be able to afford a house, it shows that something is seriously wrong with your housing market.

We already knew. However, there are definitely some sort of product-like elements that are launched near the top of the market. Let’s keep an eye out for what happens next.




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