Opinion: dysfunctional housing market is even putting retirement plans at risk

New long-term fixed rates may offer borrowers some protection from volatility, but the fact so many are opting for longer terms already shows things aren’t working.

Mortgage deals are getting longer.

Where once the two-year fixed rate was the dominant choice for borrowers, recent years have seen borrowers prefer the additional security offered by five-year fixed rates, in no small part due to them sitting at record lows. 

Now borrowers may be tempted by even longer fixed rates, stretching over many decades.

A new lender called Perenna has just secured its banking licence and has been open about its plans to offer 30-year fixed-rate mortgages.

These sorts of deals are commonplace in other countries, like the US, but have never really taken off in the UK despite successive Governments pointing to the benefits.

The security around knowing what you will be paying out each month for a long period is an important selling point.

We have seen over the last year just how much stress and worry can be caused by rates fluctuating at an inopportune time, just before you need to remortgage, so the appeal on that front will have been boosted.

The downside of any fixed rate is that there’s a danger you are locked into a rate that looks less attractive as general interest rates fall.

This is particularly notable given the way rates have changed over the last year ‒ it’s one thing to want to fix at a rate for 30 years when the rate is at 3%, but quite another when it’s 7% plus. 

Given we don’t know what the pricing of these deals will be, it’s difficult to gauge how attractive they will be.

That said, these products can have an ‘escape route’ built in too.

Perenna for example will only charge an early repayment charge in the first five years, meaning you can remortgage elsewhere to a cheaper deal if need be at that point without paying an exit fee.

Only time will tell if there will actually be a market for these deals, though Perenna says it will be offering them to the 5,000 on its waitlist before launching to the market more generally.

Opting for a longer mortgage

It’s not just fixed rates that are getting longer, however, but mortgage terms too.

Where once borrowers would opt for 25- or 30-year terms on their mortgage, there has been a spike in borrowers opting for much longer options.

Data earlier this year from UK Finance found that around one in five first-time buyers in February took out a mortgage over a term of 35 years or more.

That’s up from 8% at the same point in 2022. 

There were also increases in borrowers taking out loans of 30-35 years, among other first-time buyers and those already on the ladder.

The reasons for doing so are pretty clear.

Opting for a longer mortgage term lowers the size of your monthly repayments, which has become all the more appealing in the cost of living crisis with so many other demands on our money going up in price. 

This has become even more important, given the tumultuous state of the mortgage market.

The dramatic increases in interest rates have meant big jumps to the cost of borrowing, presenting challenges in even passing lender affordability tests.

Given that situation, a longer mortgage term may be the only option for securing a mortgage currently.

Storing up problems for later

Opting for a longer mortgage term makes a lot of sense if you’re focusing solely on keeping your mortgage payments affordable.

There are some massive downsides to bear in mind though.

First and foremost, that longer mortgage term means the loan will cost more overall.

While your monthly bills are lower, the fact that you’re paying off the mortgage for longer means that you end up paying far more interest in total.

That’s not the only problem though.

If you’re paying off the mortgage for longer, it can make it much harder to get your retirement planning in place.

After all, do you really want to have to devote some of your income once you give up work to clearing that mortgage?

While a shorter mortgage term may be more painful in the here and now, it can at least free up a little cash later on, perhaps when you most need it.

Ignoring the issue

Ultimately though longer mortgages, whether we are talking about lifetime fixes or simply extending the mortgage terms, are both a response to the crackers state of our housing market.

The reason we need to turn to these alternative tactics is because it’s become ever more difficult for people to purchase a home in the way borrowers did decades ago, with a simple fixed rate over a couple of years, and a mortgage term of 25 years or so.

And that’s become so tricky because of the extraordinary increases to the value of property in the UK.

It simply isn’t affordable for many first-time buyers.

In the end, that’s the real issue, the cost of our homes.

We haven’t built enough to meet demand in generations at this point, and that is feeding through, even given the state of the mortgage market currently. 

Until we address this lack of supply, and stop focusing all of our efforts on demand-led initiatives ‒ I’m looking at you, Help to Buy scheme ‒ then more and more borrowers will be pushed into taking on home loans that may get them onto the housing ladder but which could mean there are issues further down the line.