The long-term mortgage deal means borrowers will pay the same rate for up to four decades. What are the key advantages and disadvantages?

Key takeaways

Buyers now have the option to keep the interest they pay on their mortgage the same for up to 40 years.

Specialist lender Kensington Mortgages has launched a 40-year fixed-rate mortgage.

The deal offers borrowers the chance to pay the same interest rate on their home loan for between 11 and 40 years. 

Their interest rate will not change even if the Bank of England increases the official cost of borrowing.

Interest rates are currently at record lows, and buyers who fear the impact of rate rises could benefit from fixing their mortgage now.

The maximum term of a fixed-rate mortgage is usually 10 years. 

It is rare in the UK for fixed rate deals to cover the entire “term” of a mortgage, which is usually 25 to 35 years.

“A fixed-rate that covers the entire mortgage term is already very popular in some parts of continental Europe,” said Mark Arnold, CEO of Kensington Mortgages.

“It is likely to become increasingly attractive in a rate-rising environment.”

Why are 40-year fixed mortgages on offer now?

Interest rates are currently at a record low of 0.1%. But the Bank of England is expected to start increasing them in the near future.

If you have a fixed-rate mortgage your repayments stay the same for the product term. The deals typically have terms of two or five years. 

Opting for a longer term enables homeowners to benefit from record low rates for longer.

Even so, a term of up to 40 years is highly unusual. 

Online broker and lender Habito currently also offers a 40-year fixed rate deal. 

A handful of lenders also offer 10-year fixed rate mortgages.

Can I get a 40-year fixed rate mortgage?

One key advantage of the 40-year mortgage is that it judges affordability based on the interest rate the borrower will actually pay.

By contrast, many lenders base affordability on a hypothetical rate if interest rates rise. 

As a result, people may be able to borrow more with the Kensington Mortgages product.

What are the disadvantages of a 40-year mortgage?

Borrowers should think carefully before opting for a long-term fixed rate deal.

If you move home during the mortgage term, it should be possible to move the mortgage with you. This is known as “porting”.

But, if you want to pay your mortgage off early, you could face hefty fees.

For example, if you want to leave the mortgage in the first 15 years, you will need to pay a fee worth 7% of the outstanding balance.

The exit penalty gradually falls to 2% of the outstanding debt by year 36.

That said, there are no early redemption penalties if you are selling the property.

Crucially, these fees are also not charged if you are impacted by a critical illness or if the mortgage holder dies.

What else do I need to know about 40-year fixed mortgages?

The Kensingont Mortgage 40-year deal is available to borrowers with deposits of between 40% and 5%. 

Interest rates for people fixing for between 36 and 40 years start at 3.34%. 

The lowest rate is available to someone with a 40% deposit. This means they are borrowing 60% of their home’s value, and paying a £1,499 arrangement fee.

People with only a 5% deposit will pay a higher rate of 4.16%, if they pay the same arrangement fee.

Lower interest rates are available for people fixing for a shorter period of time. 

Rates start at just 2.83% for those fixing for between 11 and 15 years.

Leave a Reply