As the affordability crisis in some parts of the UK continues to keep would-be first-time buyers out of the property market, one broker is predicting a rise in longer-term mortgages to help keep repayments down.
Charcol said UK lenders could follow Japan’s lead, where terms of up to 100 years are being offered to cash-strapped borrowers. The predicted trend follows a long line of lender initiatives to help first-time buyers get on the property ladder ‘ from low deposits and high income multiples to more innovative offerings, such as a rent-a-room mortgage.
Ray Boulger, senior technical manager at Charcol, said longer-term mortgages could be the next initiative to sweep the market.
‘UK house prices are continuing to rise in excess of earnings, some people are looking for larger loans in order to afford these properties. If this trend continues, the only way repayments can remain affordable is by increasing the term of the loan,’ he said.
The longest term currently available to borrowers is with Bank of Scotland, which offers 40-year terms to first-time buyers. However, the lender insists the mortgage must be paid off by retirement, so only the very young can take advantage of it.
Gillian Bailey, spokesperson for Bank of Scotland, said demand is still low for longer-term loans.
‘We have been offering 40-year terms for over five years. However, we do insist the term is paid off by retirement, so borrowers are generally aged under 25. Most borrowers want to repay the loan as soon as possible anyway, so these longer terms rarely complete,’ she said.
According to Boulger, being able to pay off the loan before the end of the term is an essential feature if long-term loans are to take off. ‘For long-term fixed rates to be attractive, lenders will have to offer products with more flexibility and at more competitive rates,’ he said.
Considering recent product offerings, it seems borrowers are looking to find ways of paying off their loan earlier, rather than prolonging the debt.
Jennifer Stoddart, spokesperson for Nationwide, said: ‘The emphasis, until now, has been on paying off your mortgage early with daily interest and flexible features. Most of our members still want to pay their loan off in 25 years or less ‘ before they hit retirement.’
Nationwide, like a handful of other lenders, offers a 35-year term, which is available to borrowers depending on individual circumstances. Stoddart says higher terms may make borrowing even more difficult in the future. ‘Anything higher than this can present a number of affordability issues. It is our duty to make sure members can service their debt, and passing a mortgage on to your children only means more affordability problems for them. The interest accrued over, for example, a 50-year term, makes the mortgage very expensive. Most people will want to pay off their loan so they have equity to pass onto their children, not debt,’ she said.
The idea of children inheriting a mortgage is the most extreme outcome of offering longer terms. But the reality of paying off a mortgage past retirement would mean borrowers would have to make sure their pension was large enough to fund repayments and mean funding options in old age, such as equity release, would be inaccessible.
The Council of Mortgage Lenders (CML) advised its members to consider the changing profile of first-time buyers before offering longer-term loans.
Bernard Clarke, spokesperson for the CML, said: ‘With longer-term mortgages there are a number of factors lenders need to take into account, such as the rising age of first-time buyers. The average age now stands at 34, and many adults are saddled with more debt ‘ in particular, student debts. This has to be balanced with the reality that a large group of people will pay their mortgage off past retirement age. I do not know whether there is a legal framework for passing a mortgage on to family members, but it would not be straightforward.’
The Financial Services Authority (FSA) said it has no plans to lay down maximum terms for loans once it begins regulating the market in 2004.
Robin Gordon-Walker, spokesperson for the FSA, said: ‘We can’t tell lenders to stop lending to high income multiples or over long terms. The only thing we can do is look at the lender’s overall financial position and judge whether it is too risky.’
However, in November last year, Howard Davies, chairman of the FSA, spoke of the regulator’s concern over affordability and the danger of borrowers overstretching themselves.
He said: ‘With interest rates at their current levels the borrowing affordability index is still low. But that is no comfort to someone who loses their job and finds they have negative equity in a house they can no longer finance.’
Lenders will continue to search for solutions to help borrowers buy in a property market that has inflated out of their reach. It is easy, under such desperate conditions, to sign on the dotted line, without giving due thought to the future. No matter what ways lenders find to help more people on the property ladder, nothing is guaranteed. It is fair to say that no one, most of all lenders, wants to see borrowers overwhelmed with debt and having their homes repossessed. It seems that lenders in the UK will be thinking carefully before following Japan’s lead.
Kirstie Redford is deputy editor