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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.”
Nationwide: Average House Price Hits Record high of £255,000
Average house prices in the UK have hit another all-time high. According to Nationwide, a typical home in the UK had a value of £254,822 in December, an increase of just under £24,000 compared to January last year.
But like most other major lenders, Nationwide predicted a gradual slowdown for the sector over the coming months, due in part to the withdrawal of the government’s temporary stamp duty holiday.
In addition, Nationwide believes that the spread of the Omicron variant of COVID-19 could adversely affect the market’s performance.
“The Omicron variant could reinforce the slowdown if it leads to a weaker labour market,” Nationwide’s chief economist, Robert Gardner, said.
Mr Gardner also said that the inevitability of interest rate hikes over the course of the year will have a “cooling influence” on the sector, which sustained its record-breaking performance throughout much of 2021.
Bank of England base rates were recently increased from a historic low of 0.1% to 0.25%, with more increases on the cards over the coming months. As mortgage rates grow and house prices hover at all-time highs, getting a foot on the property ladder is likely to become increasingly difficult for many first-time buyers.
“House price growth has outpaced income growth by a significant margin over the past 18 months, and, as a result, housing affordability is already less favourable than before the pandemic struck,” Mr. Gardner added.
The UK’s highest-growth regions
In stark contrast to traditional norms, London saw the lowest average property price increases over the course of the last 12 months, up 4.2% to just over £507,000. By contrast, average house prices in Wales skyrocketed by almost 16%, reaching a new high of £196,759.
A brief summary of house price growth by region in 2021:
- Wales: Up 15.8% to £196,759
- Northern Ireland: Up 12.1% to £167,479
- South West: Up 11.5% to £294,845
- Outer South East: Up 11.3% to £329,869
- North West: Up 11.2% to £196,806
- Yorkshire and Humberside: Up 10.8% to £190,855
- East Anglia: Up 10.4% to £268,146
- East Midlands: Up 10.4% to £221,813
- Scotland: Up 10.1% to £172,605
- West Midlands: Up 9.4% to £227,031
- Outer Metropolitan Area of London: Up 8.8% to £410,992
- North: Up 7.7% to £148,105
- London: Up 4.2% to £507,230
Commenting on the figures, Nationwide stated that this was the first time in the bank’s history that Wales had seen the largest annual house price growth of any UK region.
“Price growth remained elevated in Northern Ireland at 12.1%, the strongest end to the year for the region since 2007,” Mr Gardner said.
“Annual house price growth in Scotland was 10.1%, in line with the wider UK.”
Rents Rising at Fastest Pace since 2008, Data Suggests
Average monthly rents are rising faster than at any point in the past 13 years, the latest figures from Zoopla indicate; according to the property website, the average cost of renting a home privately was 4.6% higher in September year-on-year, coming out at £968 per month.
Annual rent growth was particularly strong outside London, averaging 6% compared to the same time last year. This is the fastest growth recorded for this part of the sector in more than 14 years.
Skyrocketing monthly rents continue to be fuelled by a lack of affordable inventory and high demand for quality homes in desirable parts of the country.
The Southwest saw the biggest gains of all, with average monthly rents increasing by 9% over the past 12 months. Wales recorded its strongest performance in years with 7.7% annual growth, followed by the East Midlands with just under 7%.
The gradual easing of lockdown restrictions has seen more activity in major cities and busy urban centres as many workers return to the office and life slowly edges back to normality.
The figures from Zoopla indicate annual rent growth in London of just 1.6%, but this is still a strong performance considering average rents were down around 10% at the beginning of the year.
Some of the top-performing cities in terms of annual rent growth were Nottingham and Bristol, both of which recorded growth of more than 8% since September 2020.
Search for space fuels ferocious competition
Speaking on behalf of Zoopla, head of research Grainne Gilmore said that there was still heavy demand for spacious properties in quieter and less densely populated corners of the country.
“Households looking for the flexibility of rental accommodation, especially students and city workers, are back in the market after consecutive lockdowns affected demand levels in major cities,” commented Gilmore.
“Meanwhile, just as in the sales market, there is still a cohort of renters looking for properties offering more space or a more rural or coastal location.”
Some parts of the country have seen the kinds of average monthly rent hikes that are pricing locals completely out of their own communities. In Purbeck and Dorset, for example, average monthly rents for September had increased by more than 16% since the same time last year.
Combined with high unemployment and lingering economic uncertainty, rising rents are creating a gloomy outlook for millions of private renters.
Dan Wilson Craw, Deputy Director of the campaign group Generation Rent, said the whole thing amounted to “terrible news” for current and prospective private renters.
“We have been hearing from renters who have lost bidding wars for homes or failed affordability checks, so they are being priced out of their areas,” he said.
“The chancellor has frozen rates for another year, so these rises will make it even harder to find an affordable home. The government has to do much more to bring rents down. That means building more homes, including social housing.”
How to Sell Your Home Faster and For the Best Possible Price
Selling a home in the current climate should not prove too much of a challenge for those looking to relocate. Record demand across much of the UK has created an unprecedented sellers’ market, with prospective buyers competing ferociously for quality homes.
Still, there are always steps that can be taken to speed things up further. Not to mention, ensure that, when your home sells, you get the best possible price for it.
With this in mind, here are a few simple yet effective ways to ensure the fastest sale for your home in 2022:
- Advertise it yourself
Even if you have hired an agent to sell your home, you can still advertise it yourself via multiple channels. Social media, in particular, can be a surprisingly effective platform for listing homes for sale. The more places you advertise your property, the faster it is likely to sell.
- Get it staged professionally
A professionally staged property almost always sells faster and for a higher price. Hiring a home-staging company may seem like an unnecessary cost, but it could pay dividends. The services of freelance home stagers are always readily available online.
- Focus on first impressions
Think carefully about the first things prospective buyers will see when visiting your home. This usually means things like the driveway, porch, front door, and surrounding exterior, all of which must be in pristine condition and perfectly presented.
- Apply a fresh coat of paint
Time and time again, this has proven to be the most cost-effective way to boost a home’s appeal and market value. Go for something neutral to create a blank canvas, upon which prospective buyers can visualise how they would like to decorate each space.
- Focus on the kitchen and bathroom
It is the practical spaces within a home that tend to attract the most attention and scrutiny. If you are going to invest time, effort, and money in renovations, be sure to focus on the kitchen and bathroom. The kitchen, in particular, can be the ultimate make-or-break factor.
- Consider hiring a photographer
Nobody is going to visit your home if it does not look the part online. The photos you publish could play a major role in determining if, when, and for how much your home sells. Unless you know exactly what you are doing, hiring a photographer could make all the difference.
- Comprehensively declutter
Removing as many personal items as possible makes it much easier for prospective buyers to see themselves living in your home. Likewise, getting rid of as much clutter as possible helps enhance this ‘blank canvas’ effect you are looking to create.
- Consider the alternative options available
Alternatives to conventional property sales can also be considered in time-critical scenarios. Examples of this include selling at auction, selling for cash to a specialist property-buying company, and so on. All of these should be discussed in advance with an established broker in order to ensure you fully understand the pros and cons.
Under 40s: Opting for Lifetime Rental Instead of Homeownership
It’s fair to say that, in the past, homeownership has been the primary goal for many young people. Times have changed, and it appears that a significant number of ‘millennials’ have now no desire to get onto the property ladder but are quite content to rent for the foreseeable future.
Renting can have many benefits, making it a more attractive proposition, with one of the main reasons cited being freedom from the financial baggage and responsibility that comes with a mortgage.
With homeownership, there are a lot of hidden costs that will be entirely the responsibility of the owner. From the initial deposit to plumbing, electric, garden, and general property maintenance, the cost of buying and maintaining a home can run into many thousands of pounds.
When you rent, you are able to budget better as you have fixed costs for the property. Your monthly rent will, for the most part, remain constant each month. Any maintenance needed is the responsibility of the landlord, not the tenant.
According to the Office of National Statistics, using figures from 2017, young people are way less likely to own their own property today than ever before. Fifty per cent of people in their mid-30s to mid-40s in 2017 had a mortgage, compared to 66% twenty years ago. The same age demographic today is three times more likely to opt for a rental property than they were two decades ago. One-third of this group lived in rental homes in 2017, compared with one-ten just twenty years ago.
The figures released indicate that the population with the highest wealth status, in any age group, is more likely to buy property than those with a lower income. The number of property buyers has decreased significantly in the last ten to twenty years, mostly due to problems raising the initial deposit. But not all renters are renting out of necessity; some are making a considered choice.
The pandemic has had a marked effect on people’s choices when it comes to where they want to live and work. The normality of working from home has caused a rethink of the type and location of homes. With the elimination of travel costs to work, many have opted to put the extra cash into a property that they can work from, basically in any location they desire, which they would not otherwise be able to afford. Another vital advantage of renting is that you are able to relocate quickly and easily without the need to sell or rent out your property.
Renters have rights that they can expect from their landlord in order to protect themselves. Renters’ rights include:
- The right to know the identity of the landlord
- The right to reside in a safe property that is in good repair
- The right to be protected from unfair rent and eviction
- They have the right to have their deposit returned, provided the property is in the same condition as when they first rented it.
- The right to challenge excessive charges
- The right to live undisturbed
- The right to see the EPC (Energy Performance Certificate)
- The right to a legal rental contract (for fixed tenancies over three years)
One of the drawbacks of rental properties is that UK legislation to protect private renters is very poor, and many become victims of unscrupulous landlords.
Taking out a Mortgage in Your Later Years: Is it a Path to a Better Lifestyle?
According to a report by the Equity Release Council, the number of people expecting to have paid off their mortgages by retirement age is set to significantly decrease in the future. Five thousand participants took part in the study, carried out by the lifetime mortgage trade body, which found that 45% of homeowners under the age of 40 and 29% of those over 40 purchased homes a lot later than they had expected or would have liked to.
The research shows that a third of all homeowners are not confident that they will be able to completely pay off their mortgages by retirement age. Many have completely ruled it out, with 20% feeling that a mortgage-free retirement is completely unrealistic and unachievable.
The report suggests that buyers under 40 are less concerned that they may still be in debt after retirement. Jim Boyd, ERC chief executive, said, “There are clear signs that paying a mortgage in retirement is no longer a taboo.”
He added, ‘One in four mortgaged homeowners said they don’t mind if they are still paying off their loan in later life, while 47 per cent believe their generation’s attitude to debt in later life is more accepting than their parents’.
The research showed that 70% of people with mortgages were comfortable with the level of their mortgage debt, increasing to 75% among the over-50s. Many stated that they felt that taking out a mortgage later in life could significantly benefit them, with nearly one-third suggesting that it may improve their overall lifestyle. Just under one-third of participants felt that it could help them access funds to help out family members.
“Lifetime and retirement mortgages allow people to make the most of property as a source of wealth as well as a home. Our findings suggest later life lending products are likely to be even more important for future generations of retired homeowners than they are today.”
Will Hale, chief executive of equity release advisers Key, said: “While the challenges around homeownership for the younger generations are deep-rooted, the later-life lending industry can be part of the solution.
“The relevance of products such as lifetime mortgages is clear. Attitudes towards debt are changing, and with products now available that offer low rates alongside flexible features and important customer protections, we need to ensure that older people and their families understand all their options and are able to access specialist advice to ensure the right outcomes for their individual circumstances.”
Claire Singleton, chief executive of Legal & General Home Finance, said she was “unsurprised” that borrowers are generally more comfortable carrying mortgage debt into their sixties and seventies. “We know that the increasingly flexible range of products, such as optional payment lifetime mortgages, where customers can opt to pay the interest on their loan, is helping to make later-life borrowing a good choice for many customers.
“For some homeowners, their property is now their most significant asset. Half of homeowners across England and Wales could unlock an average of £72,988 from their homes—above the average pension pot of £61,930. With the right advice, later-life lending can help people make the best use of their property wealth.”
Base Rate Rise Results in 60% of Remortgages Fixing for Five Years
According to the LMS Monthly Remortgage Snapshot, in the month of November 2021, almost two-thirds of homeowners who made the decision to remortgage did so on a five-year fixed rate. This is a direct result of the Bank of England’s decision to increase the base rate from an all-time low of 0.1% to 0.25%.
The main reason for remortgaging was to reduce costs, with 29% of property owners citing this as their primary motivation. By using a remortgage product, almost half of borrowers were able to reduce their monthly costs by an average of £198.19.
Around 33% of clients opted for a two-year fixed mortgage, while just 2% went for a ten-year fixed product, and another 2% chose tracker products.
Seventy-two per cent of buyers stated that they had chosen fixed-rate products in order to have more control over their monthly repayments. The state of the economy and an unsure future prompted 14% to find a fixed remortgage deal where they could be locked into a good deal, thereby giving some confidence in the future.
With the uncertainty of how the future will be affected by the ongoing COVID-19 issues and the government’s attempt to stabilise inflation, over eighty per cent of buyers expect that interest rates will continue to rise over the next year.
The predicted increased interest rate was fuelled by an eleven per cent rise in remortgage instructions during the month of November, ahead of the Bank of England’s increase in December.
The chief executive officer of LMS stated that remortgage activity was “largely fuelled” by an expected Bank of England base rate increase, which was already influencing banks and building societies to re-evaluate the prices of their mortgage products.
He added: “For borrowers coming to the end of their fixed term, this rise in rates prompted many to shop around to secure the best deal possible, rather than opting for a product transfer, as shown by the rise of 11 per cent in instructions month-on-month.”
“The high activity levels we witnessed in November are set to continue for the foreseeable future, spurred on by the high volume of early repayment charge (ERC) expires in December. This should keep the remortgage market buoyant as we head into the new year with a flood of new instructions.”
What Can We Buy to Let Landlords Expect in the Year 2022?
With a slowdown in house price growth, increasingly expensive mortgages, and more stringent regulations, what is in store for landlords for the year to come?
2021 saw a boom in house prices, increased rental costs, and record-breaking low-interest rates, creating an ideal environment for landlords across the UK. With the average house price rising by £23,902 over the last year, many landlords opted to sell their properties, resulting in large capital gains for them.
With demand exceeding supply for rental properties, rental costs have increased to rates not seen for the last thirteen years. Even with the increased tax levies, buy-to-let investors have had a very lucrative year. There are, however, some potential hurdles to cross in the year to come.
Changes to regulations require landlords to make the necessary adjustments in order to make their properties eco-friendly, and there is also the proposition of the scrapping of no-fault evictions.
House prices to stabilise
Since the onset of the pandemic, house prices have risen by an average of almost £34,000, with the highest growth since 2006 in the last three months. This has resulted in many landlords benefiting from the increase and making the decision to either sell, remortgage or release equity.
Sales director at buy-to-let lender Shawbrook Bank, Emma Cox, said: ‘Despite the hurdles caused by the pandemic, the market has stood firm, and house prices have continued to soar in price.
‘This has created attractive opportunities for investors, whose confidence in the market has grown over the last 12 months. Their buying activity and trends show that the market is likely to remain strong over the short term.’
It is largely dependent on whether demand exceeds supply and whether house prices will continue to rise in 2022.
Nathan Emerson, chief executive of Propertymark, said: ‘Whilst buyer demand is expected to follow usual seasonal trends and take a dip over the festive period, agents are not seeing any signs that demand will slow in 2022.’
He suggested that any more tightening of supplies would result in a dampening of the market later in 2022.
‘Many sellers wait to see something they like and will market on account of having found it.
‘Without an enticing catalogue of potential new homes, pipelines risk becoming starved heading into spring 2022.’
According to Halifax, house prices are only expected to rise a further 1% over the next 12 months; however, both Hamptons and Savills are predicting a rise of 3.5% on average.
Rent amounts are expected to rise
With intense competition for rental properties, buy to let investors have cashed in by increasing rental charges. The number of available rental properties over the past year was down 43% below the five-year average, massively increasing the competition amongst renters to secure the property.
2021 saw a typical rent increase of 4.6% year-on-year from September 2020, with an 8.6% rise outside the Greater London area, a level not seen for 13 years.
Policy director for the National Residential Landlords Association, Chris Norris, said: ‘2021 showed some signs of recovery for the private rented sector, which tends to be counter-cyclical in nature, with economic uncertainty leading more people to rent rather than commit to large purchases.
‘Demand for rental accommodation increased across the UK, with some early indications that tenants are also returning to London after many left during lockdown.’
Estate agents are warning of many landlords leaving the market, causing a shortfall. This is also partly the result of the upcoming changes in regulations for buy-to-let investors.
‘Looking into the private rental sector, rental income is poised to remain strong as demand holds steady,’ commented Emerson.
The continued fight against COVID-19 will also have an impact on the future of the rental market.
‘The fate of rental markets in the next 12 months will rest upon the COVID-19 pandemic,’ Emerson adds.
‘Heading into winter, there is an anxiety about the Omicron variant with the UK Government moving to Plan B measures.
‘This could push a new wave of movers as people look to change their surroundings, or we may see more wanting to stay put until life feels more certain.’
Stamp duty surcharge
Although the 3% stamp duty surcharge was still required to be paid by buy-to-let investors, landlords still made significant savings during the stamp duty holiday. According to a report by Hamptons, landlords who invested during the initial stamp duty tax relief saved, on average, the equivalent of around three months rent. The 3% surcharge will, now that the tax relief has come to an end, put off some buyers from investing in rental properties.
Emeritus professor of housing economics at the London School of Economics, Christine Whitehead, said: ‘Our work on taxation of landlords across Europe suggests that as a result of the changes in taxation since 2015, individual landlords in Britain are being increasingly disadvantaged when compared to corporate landlords and other investment types.’
Increase in mortgage rates
Tax blows dealt to landlords over the last few years have been somewhat softened by the competitive and cheap mortgages available to them. With the high expectation that interest rates are set to rise in 2022, it is thought that some potential landlords will opt not to invest as future profit margins will be lower.
The Bank of England has already increased the base rate from 0.1% to 0.25%, with more rises expected in the near future.
Chief capital officer at the mortgage lender, Swen Nicolaus, Molo, says: ‘Next year could bring many things to make landlords nervous. The very strong inflation we have seen in 2021 will be a priority for the Bank of England to tackle.
‘With the base rate forecast to rise and mortgage rates potentially following it up, it will create challenges not only in higher mortgage payments for those not in fixed rates but also for affordability requirements for those looking to purchase or refinance.’
London renters returning to the capital
The pandemic led to many renters making the decision to move from London to the suburbs as priorities in the type of property in demand changed. This led to a panic amongst landlords in the capital, resulting in a drastic decrease in the cost of renting city property. Rentals had fallen by up to 12% by January 2021.
The market in London is steadily recovering, with many people returning.
Propertymark’s Emerson stated: ‘In the first half of 2021, there was a mass exodus from cities as tenants turned to rural and coastal areas in search of a more relaxed and spacious lifestyle.
‘In the second half of 2021, we have seen the return of students and some work forces back into cities; however, many returned to find landlords had sold and the availability of homes was far less than usual.’
Updated EPC regulations
With more and more regulations and loopholes for buyers to navigate, it is not surprising that they are somewhat put off investing. The EPC proposals will mean that stricter regulations will need to be complied with by a certain date.
Landlords currently need to achieve a minimum rating of E on their energy performance certificate and will be required to perform annual gas safety checks. This will increase to the required rating of C by 2025 in order to try and achieve the government’s net zero carbon emissions by 2050.
Rob Bence, co-founder and chief executive of landlord forum Property Hub, says, ‘I think the changes in EPC regulations will be a hot topic in 2022.
‘As it stands from 2025, all new lets, irrespective of the age or location of the property, will likely need to have a C rating.
‘This is due to be rolled out to existing tenancies in 2028, but there are murmurs that the government is planning to extend the deadline for new lets by one year to 2026.
‘Either way, transforming Britain’s rental stock to meet the government’s targets is a big challenge for landlords.’