New mortgage lender Perenna has made headlines today as they have been granted a licence to offer 50 year mortgages to their clients! A 50 year mortgage term would absolutely dismantle the long held understanding that between 35 and 40 year mortgage terms were all that were available. So would you take a Perenna 50 year mortgage?
Who Are Perenna?
Perenna is the brain child of three mortgage experts Arjan Verbeek, Hamish Peacocke, and Colin Bell who all previously worked together in the French bank BNP Paribas. Perenna’s website says “It is our mission to create a nation of happy homeowners where everyone who can afford a home can get one and where borrowers never have to worry about refinancing or interest rates rising ever again.” And it seems, that is exactly what the new 50 year mortgage products are there to do.
Why Is A 50 Year Mortgage Term Such A Big Deal?
For decades the maximum mortgage term someone could take was 25 years or up until retirement age. Then, lenders saw that people were struggling to borrow enough over 25 years or were struggling to keep up with payments over such a short period of time. They then introduced 30, then 35, then 40 year mortgage terms. And things remained that way for a long time with most customers and mortgage professionals alike having the understanding that 40 years was the absolute maximum mortgage term you could get. That, however, is no more.
In a previous article we posted on our website, we discussed the (at the time quite outlandish) prospect of getting a 50 year mortgage but now it seems that lenders are seriously considering the need for longer mortgage terms in such an uncertain housing market. A 50 year mortgage term would mean that if your age allowed it, you could get a mortgage for half a century and quite literally almost half your mortgage costs. For example, if you were to get a £200,000 mortgage at the age of 20 at 3.00% interest over 25 years, your monthly repayment with interest would be £948 a month. If you were to get a 50 year mortgage term with Perenna or another mortgage lender again at 3.00% (although they might charge higher interest for this product in the future) borrowing £200,000 again, you would only pay £644 a month.
With a lot of mortgage lenders, the longer you take a mortgage out for in years, the more a lender will be potentially able to lend you due to your projected monthly credit commitment going down so taking a 50 year mortgage term may also be used as a means of first time buyers borrowing more money than they could with a 30 or 40 year term, however this has neither been confirmed nor denied by any lender considering offering the new term.
Are 50 Year Mortgages A Good Idea?
So it all sounds positive right? Lower mortgage payments. Higher borrowing. And long term mortgage certainty? Well, potentially. For some people. What you need to consider when taking a 50 year mortgage term are things like the large commitment of a 50 year loan, the build up of interest over 50 years, and the potential for higher than average interest rates.
- Large commitment: I don’t think we need to explain this too much. 50 years is a long time! If you were to get a 50 year mortgage term at the age of 20, you won’t pay off the mortgage until you are 70 years old! Most peoples aim is to be mortgage free by the time they retire or hopefully before you retire so that you have more time to save for your retirement. And unfortunately, a lot of people pass away before the age of 70 so you may end up being in a mortgage for almost your entire life and passing away before paying it off. Or, if you get the mortgage with a partner, one of you may pass away before the mortgage term ends and leave the other half with 20 or 30 years of mortgage left to pay. If you think that a 50 year mortgage is something that you want to do and are committed to doing, always speak to a mortgage professional first so they can talk you through the pros and cons.
- If you get a repayment and interest mortgage (the most common repayment type) you will normally pay back the loan capital in monthly instalments plus the lender will normally charge interest at a rate chosen by themselves on the loan meaning that eventually with the repayment and the interest you have been charged every month, you will inevitably pay back more than you initially borrowed. With some standard mortgage terms i.e. 25, 30, 35 years, you could easily pay back 50K – 100K if not more back to the bank than you initially borrowed. Now think you you doubled that with a 50 year mortgage. You could see yourself paying back tens or hundreds of thousands more over 50 years back to the lender. Significantly reducing your income and your ability to save.
- With lots of different quirky or specialist mortgage products, lenders will often offer them at higher than average interest rates to reduce the amount of potential clients and increase exclusivity. None of the lenders considering offering the 50 year mortgages have confirmed any interest rate yet so we can only speculate but imaging paying a mortgage at 6.00% interest over 50 years. Not entirely unimaginable.
It will be interesting in the coming months and years to see if there is an appetite for longer mortgage terms from lenders and mortgage customers and only time will tell if these mortgages will work. In the meantime, if you or anyone you know is interested in taking out a new mortgage over a longer period of time, we are always here to offer our guidance. Please feel free to give us a call today to see how we can help.