Why the last chord can be more tempting than it looks


This week saw the launch of another 40 year fixed rate mortgage, this one from a specialist lender. Kensington, accessible through mortgage brokers only. It follows a 40-year fixed rate deal offered earlier this year from a new lender called Habito.

Fixing your interest payments during this period can seem crossed out, and indeed very long-term fixed rates are not particularly appreciated by borrowers or professionals, who see them as inflexible. I’m not entirely sure I agree with this view, depending on the fine print of the specific product.

I have several reasons for this. First, the seemingly inexorable rise in house prices and the inability of wages to keep up have pushed more and more first-time buyers to take out longer mortgages. Moneyfacts data shows that the number of available 40-year mortgages is now 146, indicating that there is some demand from borrowers.

However, a 40-year term should not be confused with a 40-year fixed rate; many new homeowners choose to borrow over 40 years to reduce their monthly payments in order to remortgage on shorter terms later when they earn more, saving themselves unnecessary interest.

Fixing for 40 years has long been something the market hasn’t offered, in large part because of the way mortgages are generally financed. A 40-year term would be prohibitive if it were valued in the capital markets. But first Habito and now Kensington have solved this problem, and the Kensington Accord is really interesting. It is funded by Rothesay Life, the UK’s largest specialist pension insurer, and therefore the pricing is much more realistic.

At 60 percent of the loan-to-value ratio, rates start at 2.83 percent for a 15-year term, 2.85 percent for 25 years, and 2.90 percent for 30 years. No prepayment charges apply if the customer sells or moves, which is essential for this transaction to work, and overpayments are allowed up to 10% of the remaining mortgage balance per calendar year.

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Affordability is based on the fixed interest rate, not a higher standard variable stress rate, which means it may be possible to borrow more than a two-year fixed rate. And finally, the mortgage can be transferred to new property; where the rate and the fixed monthly payment will remain the same.

If more insurers follow Rothesay’s lead, the shape of the mortgage market could very well change for good. My second reason for skepticism that “no one wants to fix that long” is reflected in the fact that Kensington pays mortgage brokers whose clients accept the deal a proxy fee – a commission – at 0.75% of the balance.

Two- and five-year agreements pay between 0.25% and 0.45% commission. Sounds like compensation to me for the broker forgoing future remortgage commissions when recommending a long term solution. Third reason – interest rates are insanely low and are only going one way – on the rise. Since this mortgage is so flexible and you can overpay even I am tempted.

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