Insight - 50-year mortgages pose high risk for the housing market

According to a leading property firm, the latest announcement that a specialist lender has been given a license to off 50-year fixed-rate mortgages poses a considerable risk for the housing market.

DJ Alexander Ltd, which is the largest lettings and estate agency in Scotland and is part of the Lomond Group, believes that while increasing mortgage terms to 50-years may appear to benefit first-time buyers, it also has the potential to simply delay a downturn in the market.

Rather than resolving issues for borrowers, it may result in exacerbating problems.

Possibly paradoxical

Following on from previous Prime Minister Johnson’s comments last month that he would be open to encouraging 50-year mortgages with debt potentially being transferred to the next generation, this indicated that the current government are serious about developing this policy.

If fully implemented, such a policy has the very real potential to encourage a short-term boom in the housing market, which will be followed by a long-term bust.

David Alexander, the chief executive officer of DJ Alexander Scotland, commented: “While it is right that governments’ should seek to introduce policies that enable more people to buy their own homes this is one idea which simply won’t work. Having housing debt last 50 years, even at a fixed rate, with the very real potential for this debt to transfer down the generations is a policy that will cause stagnation in the housing market rather than growth.”

“With people stuck on 50-year mortgages they are unlikely to be able to afford to move as it will take decades for equity to accrue, debt will remain very high for years resulting in the bulk of repayments being made against interest, and there will be little opportunity or ability to move home despite the likelihood of changed circumstances.”

David continued: “While it may suit a young couple who borrow on this basis in their twenties this could become a burden when they start a family and need to borrow more to buy a larger home After a decade, they will have paid off very little and any accrual in value will be matched in the property market they live in limiting their options to change home.”

“With the housing market tightening and the potential for a fall in prices now is not the moment to fuel growth in the housing market. What the housing market does not need are longer mortgages, less stringent affordability criteria, or higher borrowing multiples. If the government really wants to stabilise or reduce prices, then they need to increase supply. Demand has been outstripping supply for years in both social housing and the private sector and unless this is resolved there will continue to be housing shortages and rising prices.”

David concluded: “The solution to the problem is to encourage more homebuilding through an easing of the planning system; seriously increase the volume of social house being built; and encouraging investment in the private rented sector to continue to meet the demands of people not currently buying and not eligible for social housing. A 50-year mortgage is simply temporarily sustaining the market and passing debt on to the next generation which does nothing to resolve the long-term underlying issues in the housing sector.”