Let’s put aside for a moment the thought of intergenerational lending, horrid as that first sounds. And acknowledge these truly are brand new products, which means not a whole lot are known currently about them.
It seems inevitable that the prevailing interest rate for them will be higher than other fixed-rate mortgages. Perenna themselves have yet to announce this but Habito and Kensington charge significantly more than the market average for their long-term fixes.
According to the first quoted article, for a 36–40-year flexi fixed term product Kensington Mortgages’ lowest rate is currently 4.34 per cent with a £1499 completion fee at 60 percent LTV. The deal also includes the option of 10 per cent overpayment and can be used for house purchases or mortgaging your property.
The lender also offers (for purchases, not refinancing) a 95 percent LTV for the same term at 5.16 per cent with the same completion fee and an allowance of 10 per cent overpayment.
So, what kind of market response has there been to these long-term flexi/fixed rate products? From the above article.
Craig McKinlay, new business director at Kensington Mortgages, says it has seen a lot of interest in its long-term product from first time buyers.
The 5 per cent deposit option on the mortgage is attractive to those getting a foot on the ladder, and the fixed rate provides security amid the ongoing interest rate uncertainty.
A longer-term mortgage also avoids the inevitable hassle and stress of re-mortgaging your property every two or five years. Instead, homeowners can plan further ahead financially with the security of knowing exactly what their mortgage payments will be long term.
Sales speak sure, but you’d agree there’s some merit in what’s said. First time home buyers arguably would appreciate some certainty. Well, what was said next should incur the opposite thought.
Furthermore, because the rate never changes lenders do not have to bother with a rate-based financial stress test for borrowers.
For mine, that’s insane. That spotting a fire and then pouring gasoline on it in a vain attempt to put the fire out. Did you know the Bank of England has abolished its mandatory financial stress tests for lenders?
Whilst there’s nothing stopping any bank or lender from applying those same tests themselves, there is no mandate to do it.
No mandate means no oversight. Easier credit.
Yes, it’s early days here, but the trend is global here, and it’s troubling. We lack critical details for now, like what Loan to Value Ratio (LVR) Perenna will apply to borrowers (20%LVR, 5%?) nor do we know what penalties there are implicit in the contract should a borrower need to break the contract or refinance.
But with the October announcement here in Australia of 5% down mortgages backed by the government for first time home buyers, it really is time to call these out for what they are.
This is not financial innovation, this is desperation! This literally is the final gasps of a financial system intent on squeezing the last drops of blood out of an indebted society, regardless of the long-term consequences.
And it is a sign, a sign to do the opposite. Young first time homebuyers risk becoming entrapped. I say this because I know my 18.6-year Real Estate Cycle history. Should history repeat, I know full well how this will end.
I don’t want you to become another victim like so many others will this late in the cycle. Knowledge is power, and the best knowledge to have to assist you right now is here—via a membership to the Boom Bust Bulletin (BBB).
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It’s that same timing that shows me that, as the peak of land values approaches, interest rates rise (which benefits those with fixed rates) but as recession begins and the floor of the real estate market collapses, governments insist on lower rates (hurting those with fixed rates).
Those who get their timing wrong on this decision have no choice but to stay put and pay those higher rates.
A huge strain to place upon young people with their whole working careers ahead of them. Possibly even affecting their decision on when to raise a family.
Now is not the time to go into too much debt. Instead, become a contrarian, one versed in how the economy moves, why it does so, and when.
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