On 23rd November 2021, Kensington Mortgages launched a 40-year fixed rate mortgage. Funded by pension insurer Rothesay, this unusual mortgage offers security to borrowers amidst concerns regarding rising interest rates. Kensington Mortgages is a specialist mortgage provider, who state they serve “people the high street is not always set up to cater for”.
Kensington Mortgages is one of very few mortgage providers to offer 40 year fixed-rate loans, with the first such product only being announced in March 2021 by digital lender Habito. Another digital lender Perenna also launched 30-year fixed rate mortgages in 2021. Kensington Mortgages is the first established lender to release this style of mortgage.
Kensington Mortgages’ 40-year loan is being released alongside 15, 25, and 30 year fixed-rate mortgages. They have loan to value (LTV) ratios of between 60% and 95%, which is standard, and have a maximum loan of between 2 million GBP with a 60% LTV down to 500 000 GBP for a 95% LTV.
The standard mortgage term in the UK is 25 years though mortgages of 40 years are available from major lenders such as Lloyds Bank and Santander. The major difference is that Kensington is offering a fixed rate loan for the entire term of the mortgage, whereas the average fixing period (that is the length of time where the initial interest rate on the mortgage lasts) is 3.6 years. Long term fixed rate mortgages are a new style of loan for the UK market. Currently, 5 years is considered a long fixed-term, and 10 years is usually the maximum offered.
By having a long-term mortgage at a fixed rate, borrowers have certainty about how much their mortgage will be into the future. This is important given the concerns about rising inflation, and the strongly anticipated rise of the current record low interest rates at the December Monetary Policy Committee meeting.
The 40-year fixed interest mortgage also allows people to borrow more, as there are lower stress test requirements. Post the 2008 financial crisis, lenders must ensure borrowers can still meet repayments should interest rates rise. In 2017, the Bank of England set this test to be 3% above the Standard Variable Rate of the mortgage. This means someone borrowing at 2.5% would have to be able to pay at 5.5% for the mortgage to be accepted. If the mortgage does not ever rise during its entire term, as is the case with a 40-year fixed rate mortgage, these tests do not have to be made. This may make more people able access mortgages or be able to borrow more. This means these loans could make home ownership more accessible for younger generations struggling to get on the housing market.
“A (longer) fixed-for-term mortgage – already very popular in some parts of continental Europe – is likely to become increasingly attractive in a rate rising environment,” said the chief executive of Kensington Mortgages, Mark Arnold. However, he also acknowledged that the product “may not always be suitable for everyone.”
In exchange for the certainty, borrowers face higher interest rates. The lowest rate Kensington offers on its 36–40-year fixed rate loans is 3.34% for 60% LTV and up to 4.30% for 95% LTV. For its similar product, Habito offers rates between 4.65% and 5.80%. In September 2021, a mortgage fixed for 10 years has an average rate of 2.60%. The disparity is because lenders cannot increase the interest rate if market rates rise so these loans are riskier. The overall interest cost will also be higher as the mortgage is over a longer term.
Other disadvantages include that borrowers could get stuck paying high interest rates and miss out on lower rates in the future and that the term could stretch into retirement where pensions may struggle to cover the loan. Furthermore, the maximum age when the 40-year loans will be considered is 30, meaning repayment may continue until 70. The length of the term makes it more likely that the borrower could not repay the loan, whether that be due to injury, sickness, or a limited pension during retirement.
The UK government has supported the move. MP John Glen, the Economic Secretary to the Treasury, said, “Greater product choice creates more competition and more options for consumers,” and stated that some consumers will prioritise the long-term certainty this offers. He also celebrated the innovation in the mortgage market. Raising the traditional fixed-rate mortgage length from 2 or 5 years to the full term of the mortgage was a part of Boris Johnson’s speech at the Conservative Party conference in October 2020. It is hoped these products will help more people become homeowners, although the government had no part in bringing these mortgages to market.
These new loans offer a new option for consumers and may be popular in the face of rising interest rates. Perenna, who offer fixed rate loans up to 30 years, say potential borrowers must join a waiting list because the product is so popular. However, the only firms to offer them are minor market players. For example, Kensington Mortgages holds only 0.4% of UK mortgage market share. These loans mark a different culture to the current UK mortgage market. Until a major lender brings out a long term fixed rate product, they will likely remain specialist.
By James Miller
Sector Head: Charlotte Snell