A 50-year mortgage scheme is being considered by No. 10 to tackle the housing crisis, allowing more people to build up equity rather than pay rent.
Experts in mortgages said the notion might bring some advantages, but also noted potential issues, including the possibility of saddling children with debt and the failure to address the fundamental issue of housing supply.
It is unclear how the government would enable people to borrow more money if a longer mortgage period were instituted, but the idea is being studied. Institutions such as schools might be given government-owned land to build housing for workers who can no longer afford local living, in addition to trying to free up government-owned land for fast building.
During his trip to the Nato summit in Madrid this week, Boris Johnson confirmed that the notion of 50-year mortgages is being studied, stating that the government wishes to come up with all sorts of imaginative approaches to help people get a home.
He said that 400,000 first-time buyers last year was a great figure, but they must keep those numbers high if they are to tell the government’s economic story. That is what is critical.
Do the sums on a Mortgage calculator
Anyone inputting the numbers onto a mortgage calculator with the current eye-watering interest rates will no doubt take interest in spreading the costs over a longer period of time to make the payments more manageable.
The concept of multi-year mortgages being passed down through generations is not new and has been practised in Japan for quite some time, where 100-year family mortgages have been available for some time.
The main difficulty is that house prices have risen much more than wages have in England. Now, people who work full-time must spend 9.1 times their annual salary to purchase a home.
People who are unable to buy houses at present might be able to do so if they were able to borrow larger sums with the same monthly mortgage payments for longer-term mortgages, thus reducing the money they spend on repayments compared to what they currently spend on rent.
However, Hudson Rose’s managing director of mortgage, Graham Taylor, believes the idea had complexities. It sounds like a wonderful idea on the surface but the issue remains that the loan must be affordable for all the original recipients as well as their offspring, or else the children might be unable to handle the burden and, as a result, when secured against their homes, produces disastrous consequences.
There are also other risks, such as inheritance tax obligations and the requirement to continue paying into retirement, if a property is transferred to children.
Also, with pressure mounting on Boris Johnson’s role as Prime Minister, the idea may never get out of it’s infancy.
More people on the housing ladder but with some risks
Long-term fixed-rate mortgages are becoming a popular financial product that in theory should give first-time buyers the freedom to get on the property ladder if there currently can’t match the housing prices of the market.
Prospective providers say that by extending the repayment period to 29 years, buyers will be able to borrow up to 8 times their income rather than the current average of 3.2 times, which is what we already see today.
Pension funds and insurance companies would provide the loans, thereby satisfying the Bank of England’s prudential requirement by borrowing rather than using less stable consumer deposits.
Many renters find themselves unable to get a mortgage on the property they live in, despite the fact that their payments are often lower than the rent. A long-term fixed-rate mortgage could allow a household with an annual income of £50,000 to borrow £400,000 rather than about £150,000, unlocking this bind.
The approach tries to address a significant issue. According to the Office for National Statistics, last year employees in England typically spent about 9.1 times their annual workplace-based earnings to purchase a home; this figure rose from 7.9 times earnings in 2020.
Long-term fixed-rate loans are what Perenna, an upstart firm still awaiting its licence, intends to offer. Colin Bell, co-founder of the company believes that first-time buyers are particularly interested in long-term loans. People are unable to get on the ladder because they do not meet the proper affordability tests, which take into account interest rate increases. A small mortgage is all they can get.
Current lending rules restrict lenders from making more than 15% of their loans if the loan-to-income ratio is above 4.5. Long-term fixed-rate mortgages would become an option for more first-time buyers if the Bank of England increased this.
Long-lasting mortgages could be transferred to other properties, and unlike conventional mortgages, bequeathed after death, he said. However, inheritance tax might be payable.
The organisation UK Finance, which represents the banking and financial services sector, said the advantages of fixed-rate mortgages included lower monthly payments and certainty about the interest to be paid. The disadvantages include higher long-term interest rates and slower progress in building equity. Furthermore, mortgage terms might extend into customers’ retirement. Break charges might also be higher.
Long-term, fixed-rate mortgages may not be as effective if there is no political will to increase housebuilding, which might be more effective in solving the affordability problem. The number of new homes required annually in England is said to be 340,000, compared with 216,000 built in 2019-20, the last year for which complete data is available.
The chief executive of the Homeowners Alliance, Paula Higgins, said that the commitment to build houses has gone down the priority list for the governments. They are attempting to increase demand by extending the right to purchase [affordable housing] to increase demand. However, average incomes are growing farther apart from average house prices, and therefore we will not be able to follow in our parents’ footsteps when teachers and doctors owned their own homes.
The decline in homeownership rates has had a significant social impact. 1.4 million more families would own their own homes if the level of ownership in the early 2000s were to be achieved again.
A government that can reset the balance between home prices and household incomes can reap significant political rewards, but doing so when prices are rising 10.5% annually remains extremely difficult.