50-year mortgages — Why can’t they work in the US?

50-year mortgages touted as a solution to affordability issue

Long term, fixed rate mortgages are being suggested as a way to help younger generations access a housing market that is now out of reach for most.

Before his resignation as U.K.’s prime minister, Boris Johnson told reporters last month that inheritable 50-year mortgages might be able to ease that country’s home affordability problem.

For Johnson, it’s all part of an effort to find “creative ways to help people into ownership.”

Arjan Verbeek, chief executive and founder of Perenna, said mortgage lending is broken in the U.K.. He recently told the Financial Times this week that longer-term rates will help borrowers plan during a cost of living crisis.

“Rates are going up and if you have a household budget to manage, you need to know what you're paying on your mortgage every month.”

Perenna could offer rates at about 4-4.5%, depending on the Gilt yield at the time. Gilts are British Government bonds, similar to the U.S. Treasury securities. And instead of using customer deposits to fund the mortgages, like traditional banks, Perenna will issue covered bonds, secured against borrowers homes, on the London Stock Exchange.

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Advantages of a 50-year mortgage

As it stands, the 30-year fixed-rate mortgage reins supreme, with more than 90% of U.S. buyers opting for that arrangement, according to a report from Washington-backed mortgage guarantor Freddie Mac.

One reason the 30-year is so popular is that it generally coincides with the time people retire, says Marc Savitt, president of The Mortgage Center brokerage.

“I have a lot of different investors, and I don't see any of them offering 50,” says Savitt. “A lot of people don't want the 50-year [duration].”

But affordability remains a pressing issue for Americans. A study by Porch.com found 61% of renters in the biggest metropolitan areas in the U.S. are priced out of buying a home, even if they saved up for a substantial down payment.

The advantage of a 50-year mortgage would be a considerably lower monthly payment, which can open up homeownership to more people or boost a buyer’s ability to afford a bigger home. You also wouldn’t generally need as high a credit score.

However, this type of mortgage comes with some major drawbacks.

Disadvantages of a 50-year mortgage

While it is possible to get a mortgage as long as 40 or 50 years in the United States, they aren’t qualified mortgages.

Qualified mortgages must adhere to rules set by the Consumer Financial Protection Bureau, which are in place to make sure borrowers don’t go broke like during the 2008 financial crisis.

One of these rules is that a qualified mortgage may not have a term of longer than 30 years, making a 40- or 50-year term a no go.

Not all lenders are keen to play with non-qualified mortgages — the loans cannot be sold to Freddie Mac or Fannie Mae, for example — making this option not as widely available.

You’re most likely to get one through a non-traditional lender, credit union or a mortgage lender that specializes in loans for those with bad credit.

Other disadvantages include building equity at a much slower pace and that the interest rates and fees are generally higher.

“Normally, long-term debt has a higher interest rate than short-term debt, even if future short-term rates are unchanged,” says Jiro Yoshida, associate professor of business at Pennsylvania State University and guest associate professor of economics at the University of Tokyo.

50-year mortgage vs. 30-year mortgage

Over the very long term of a 50-year mortgage, those higher interest rates can result in a catastrophically higher borrowing cost.

Take the example of a $400,000 home loan. To keep things simple, let’s use a fixed interest rate of 5% for both terms.

30-year mortgage: The monthly payment is $2,147.29 and total interest cost is $373,023.14.

50-year mortgage: The monthly payment is $1,816.56 and the total interest cost is $689,933.05.

The difference in monthly mortgage payments is only about $330 but the difference in interest paid over the course of the loan is over $300,000.

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50-year mortgages: A failed experiment?

This type of mortgage was more commonly available in the U.S. in the past.

In early 2006, mortgage lenders in southern California began offering 40-year and then 50-year fixed-rate mortgages to homebuyers struggling with the area’s high prices.

Savitt, however, agrees with the idea that 50-year mortgages were a “failed experiment.”

“The 50 year mortgage, it's a Band-Aid, it's a temporary fix,” he says.

Even if homeowners have the option of refinancing when rates drop and moving to the more conventional 30-year mortgage, Savitt isn’t keen.

“That's going to be a payment shock to them because you're taking 20 years off the amortization on your mortgage. Even though the interest rate may bring you down a little bit, you're taking 20 years off, which means your payments are going to be a lot higher.”

As for making a mortgage inheritable by future generations, Savitt said “it isn’t a bad idea” — but it’s a leap to expect that a borrower’s children will have the desire and the means to take up a loan from decades past.

*— With files from staff reporter Lauren Bird

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