Would you keep your car for 40 years? Most people would say no as your car ages and degrades and becomes more and more expensive to keep running. Well, what if your car dealer guaranteed that your car would cost you the same amount every month throughout its 40 years with you?
This week Kensington mortgages launched its first long-term fixed rate mortgages, allowing borrowers to freeze their monthly payments for between 11 and 40 years. Unlike most mortgage lenders who commonly offer between 2- and 10-year fixed products, Kensington are giving buyers the opportunity to have comfort and rate stability for a longer period without having to worry about their monthly payments becoming astronomical with any future rate hikes.
The deals that Kensington are offering have different rates depending on the actual mortgage term chosen and amount borrowed but they have confirmed that they are available up to 95% LTV for new purchases or up to 85% LTV for remortgages. Kensington have announced the following rate bands:
1. Rates start from 2.83% at 60% LTV for a 15-year term.
2. Rates on a 25- and 30-year term, at 60% LTV start at 2.85% and 2.90% respectively.
3. Rates on a 25- and 30-year term, at 95% LTV, are available from 3.71% and 3.77% respectively.
Some more perks that Kensington have announced are that the mortgage affordability for these products will be based on the fixed interest rate, not on a higher standard variable stress rate, meaning that many applicants may be able to borrow more than they would on a standard mortgage. The products come with free legals and no product fees. Gifted deposits are permitted so long as they meet the eligibility criteria set out by the lender. No early repayment charges apply if moving home, selling, or a critical illness or death occurs. Overpayments are allowed up to 10% of the original balance per year.
Kensington Mortgages chief executive Mark Arnold has said: “Over the last 12 years we have become accustomed to ultra-low interest rates. Many homeowners have never known anything else. But nothing lasts forever, and it looks very likely that we will see a succession of interest rate hikes and we may begin to slowly approach again an historical average. A fixed for term mortgage is likely to become increasingly attractive in a rate rising environment. Whether you’re a first-time buyer or homeowner wanting an affordability boost, a self-employed worker worried about remortgaging, or someone wanting greater certainty on monthly repayments – our new Flexi Fixed for Term can help.”
Although this all sounds positive and Kensington are confident that their new products will positively benefit younger buyers, Leah Milner in her article for mortgage strategy is concerned about the impact this could have on thousands of people’s retirement plans. A mortgage fix for 40 years may save someone per month in the short term, but it is worth remembering that the interest incurred over the 40-year period will mean that you would end up paying back much more than you initially borrowed in the first place and 30-40 years into your mortgage, you could be retired with only a pension income to pay the mortgage.
According to calculations by Interactive Investor, a 30-year-old currently earning £27,500 is on track for a pension pot worth approximately £190,000 if they pay 8% of their salary into a workplace scheme until they are 68. They have also calculated that based on average yearly mortgage repayments of £7,644, someone who has a mortgage to 75 would need private pension savings to deliver an income of £19,105, on top of their state pension, to age 75, to cover their living costs and mortgage. The pot worth £190,000 would run out at age 75 if it had to cover this full amount, leaving that person dependent on the state pension alone from that age. Without mortgage costs to 75, the pot would last until age 79.
So, lots of things to take into consideration if you think that fixing your mortgage for a longer period might be good for you. 40 years is a large commitment and should never be taken up without full in-depth assessment and advice to make sure that it is the right thing for you. If you want to explore your options, then please feel free to give our friendly advisors and team a call on 02088771169 to see how we can help.