There’s plenty of talk right now surrounding long-term mortgages and the dangers they present, with one regulator at the heart of the debate.
The Prudential Regulation Authority (PRA) sparked things off by hitting out against lenders for offering 35-year mortgages rather than the standard 25 years. It warned that doing so “increases the possibility that the final instalments may have to be met from post-retirement income”.
Such concerns seem to completely disregard the remortgage market, despite the fact that remortgage lending topped £65bn in 2017. The assumption that a 35-year-old who takes on a 35-year mortgage will never remortgage in that time to a shorter term is naive to say the least.
However, taking out a mortgage for over three decades is not the only way longer mortgages can be of use.
While longer term mortgages may be causing controversy, longer mortgage deals are proving to be advantageous for borrowers.
One of the big talking points in the industry over the last couple of years has been stress testing. Tighter regulation has meant lenders must now assess whether a borrower could still afford their mortgage if base rate rose by 3% above their current rate.
In the buy-to-let world of course we’re seeing stress test rates of 5.5% almost across the board.
Bypass stress tests
But perhaps it’s not widely known that fixing for a longer deal can actually help to bypass those stricter stress test rules.
This is certainly the case in buy-to-let where it’s common to have lower stress tests on five-year deals.
Indeed, the PRA rules that require lenders to stress test all new buy-to-let mortgages at a notional rate of 5.5% only applies to mortgages with terms of less than five years and much of the buy-to-let market is made up of two- and three-year fixes.
But it’s also happening in the residential sector with lenders able to offer larger loans on five-year fixed rate mortgages due to the same reduced stress testing.
Clearly tying in for that little bit longer has big benefits and with persistent talk of a rate rise – including warnings from Monetary Policy Committee member Michael Saunders that households should be prepared for higher rates – now might be a good time to do so.