Mortgage provider plans 50-year fixed rate loans, but are they right for you? Pros and cons

A new lender hoping to offer 50-year fixed rate mortgages has been given a UK banking licence.

With the housing market looking increasingly unaffordable for many, Perenna believes the loans will help younger people get on the property ladder as longer mortgages will lower monthly repayments. But critics say they will see buyers paying back more in the long run.

The start up will first offer 30-year fixed rate mortgages before lending for longer terms.

Prime Minister Boris Johnson has previously mooted the idea of family mortgages that could be passed on to children when the homeowner dies, as home ownership looks out of reach for many first time buyers.

House prices have surged in the last few years as demand far outstripped supply in the wake of the coronavirus pandemic. Many re-evaluated their property needs with a desire for a bigger home, or a new location due to the new-found ability to work from home. Plus the stamp duty holiday saw buyers bidding higher than they may have done to secure properties before the tax cut deadline.

House prices have risen 11.8% year on year in the latest figures from the Halifax Price Index, in the sixth consecutive month of double digit growth annually. The average UK property now costs £293,221.

Meanwhile inflation jumped to 10.1% in July and in response the Bank of England raised interest rates for a sixth consecutive time. The base rate currently stands at 1.75%, with the Bank looking set to add another rise on September 15.

The rise in interest rates will impact mortgage repayments, with loans already much more expensive than they were a year ago.

Arjan Verbeek, chief executive and founder of Perenna, which hopes to start offering loans next year, said: "Rates are going up and if you have a household budget to manage, you need to know what you’re paying on your mortgage every month.

“With inflation running high, this will take a chunk of the stress out."

Long term mortgage deals are hard to come by, with UK banks and building societies only offering up to 10 years.

However start-up Habito recently started offering 40 year mortgages.

Another online mortgage provider, Kensington, is also offering 40 year fixed rate loans. It's Fixed for Term 40 year loan currently offers a 4.34% interest rate at a 60% loan to value.

Pros of a 50 year fixed rate mortgage

One of the main benefits of a long term mortgage is cutting monthly repayments as they are spread over a longer period of time. This makes it much more affordable for first time buyers or those with low incomes to get onto the housing ladder.

Mortgage advisors London Money calculated a first time buyer could slash their mortgage payments by more than £600 a month if buying a property in the capital.

Using the average price of a London home - £523,666 - it estimated someone borrowing 90% over 25 years at 4% interest would pay £2,488 a month. Spreading that over 50 years would take repayments down to £1,818, it said.

Rising house prices and general living costs mean many are taking out interest-only mortgages because the high payments are simply unaffordable. But when it comes to the end of the mortgage they don’t own the property and still need to repay the full amount owed. Spreading the cost over a longer period will ensure repayments are reasonable and the property belongs to the mortgage holder at the end of the term.

The other thing to consider is the value of money. A monthly repayment of, say, £1,500 may feel like a lot of money in 2022, but after decades of wage rises and inflation, that £1,500 will likely be a much smaller percentage of a homeowner's income.

Secondly, although interest rates on these long term loans are much higher than two or five year fixed rates right now, this may not be the case in a few more years as the Bank of England grapples with soaring inflation. Bill payers with a 50 year mortgage will have stability over their monthly payments - the cost will never change - taking the volatility and stress that comes with it out of the equation.

After more than a decade of low interest rates (the last time the base rate was this high was January 2009 when it dropped from 2% to 1.5%) mortgage holders are now frantically trying to lock in their loans for longer periods to weather the cost of living storm.

But 50-year fixed rate customers will not have to worry about changes to bills.

New mortgage providers are also being funded differently to traditional banks and building societies, meaning some can offer more flexibility such as allowing customers to repay early or move house without extra fees.

Cons of a 50-year fixed rate mortgage

The obvious con of a long term mortgage is a holder will repay more money in the long run. With more people suddenly able to get onto the property ladder, this will likely inflate the market even further, as demand increases even more. Many see this as a short term idea which could drive up house prices even further.

With such long mortgages, there is the chance that a customer could still be repaying the loan way after retirement. This isn't necessarily affordable, especially if relying solely on the state pension.

The other problem is if one or both of the mortgage holders dies. If a spouse takes sole responsibility for repaying the loan, they may not be able to afford it. The debt could also be passed on to children if they inherit the property.

Some long-term mortgage providers do allow overpayments, and some even for free. If a long-term fixed rate mortgage is the only way someone can get onto the property ladder, it could be prudent to may overpayments when possible to shorten the length of the loan.