Brokers discuss the idea of 'Dutch-style' mortgages – one thinks its "bonkers"
Ministers are considering the benefits of ‘Dutch-style’ long-term fixed mortgages for first-time buyers who are struggling with affordability at present.
With this in mind, Mortgage Introducer reached out to brokers to determine if they think this is a viable solution or not.
“Bonkers” idea
Darryl Dhoffer (pictured), from The Mortgage Expert, said it is a “bonkers idea”, and means borrowers will pay more interest.
“With a 40-year mortgage, you will be paying interest for a longer period - this means that you will end up paying more interest overall,” he said. For example, if you take out a 40-year mortgage at 4% interest on a £200,000 loan, Dhoffer said a borrower will pay £140,000 in interest over the life of the loan. If you take out a 30-year mortgage at the same interest rate, he added that the same borrower would pay £108,000 in interest.
“You will build equity slower, too; with a 40-year loan, a borrower will be paying more of their monthly payment towards interest and less towards capital; this means that it will take them longer to build equity in the home,” Dhoffer said.
In addition, Dhoffer said borrowers will be more vulnerable to interest rate changes; he added that if interest rates reduce, a borrower could be losing out on lower repayments if they are tied into a 40-year mortgage with high early repayment charges.
Lewis Shaw, owner and mortgage expert at Shaw Financial Services, backed up Dhoffer’s words - suggesting a 40-year mortgage is a “terrible idea”, and a “knee-jerk reaction” to a transient problem.
“This does not solve the problem but would only exacerbate it; we do not have an issue with mortgages per se, we have an inflationary issue that will be fixed, and we have a problem with house prices completely detached from average wages,” he said.
Shaw added that a 40-year fixed-rate mortgage does not improve the underlying causes of where we are; and he believes this is “fiddling while Rome burns.” The only way to sustainably help first-time buyers, Shaw said, is to build more good quality affordable homes, as well as to stimulate economic and wage growth without inflating property asset prices.
“We need to move away from property speculation and start seeing bricks and mortar as what it is designed for, namely a place to live,” he added.
Positive move
Andrew Montlake, managing director at Coreco, said there are a few lenders waiting in the wings to bring to market a new breed of longer-term mortgages, which crucially need to be very different from the traditional form if they are to be successful.
“They need to be competitively priced, have little or no early repayment charges, and allow much greater borrowing capacity,” Montlake said.
He added that the UK has long been an outlier in the provision of these types of loans, and this would be a much-needed addition to the mortgage market, giving borrowers more choice. However, Montlake said no-one is under any illusions that this will do anything to help solve the housing issue.
“To do this, we need a long-term joined up housing strategy, building a mixture of social, affordable and private housing together with the infrastructure needed to really make a difference; until this is done everything else is just window dressing,” he said.
Rob Gill, managing director at Altura Mortgage Finance, said long-term fixed rates are commonplace in other countries, and are surely an idea whose time has come in the UK.
“Crucially, such products have no penalties, making them highly flexible as well as providing security for both the lender and the borrower,” he said. Gill added that the UK property market in general needs longer-term thinking and such fixed rates should be part of the solution.
Do you believe 40-year term mortgages would be a good idea for the market? Let us know in the comment section below.
