A bit of advice on long-term fixed rate mortgages
1st February 2018
Are you a first-time buyer? Maybe you are looking to upsize your house in the near-future? Or are you considering a re-mortgage?
Regardless of which applies to you, now is a great time to think about all of the market offerings – rates are at a record low, and long-term fixed-rates are much more commonplace than previously.
In the last 5 years alone, the number of mortgages allowing you a fixed-rate for 10 years has jumped from 17 to 85. Coupled with mortgage rates halving on average in the last decade, and the added security that a long-term fix brings, 10-year plans are looking more compelling than ever.
But even though you might expect the increase in options to have made these decade-long fixed-terms more popular with borrowers, according to the industry body UK Finance, only about 2% are choosing one of these plans currently.
So why is this the case? And why should you be considering a 7-10-year plan alongside the common 2-5-year plans?
The main reason to be considering a 7-10-year plan is due to the easier management of risk that is incumbent in mortgage deals. It is an intimidating thought that as soon as the fixed-term of your mortgage is over, the variable rates could leave you paying unexpectedly high amounts, placing a significant burden on your finances. Traditionally, the solution to this would be to continuously re-mortgage when your fixed terms have expired, but to do so you will incur lender’s fees, which could make an initially attractive short-term mortgage more expensive than the more stable 10-year option. According to Aaron Strutt of Trinity Financial, “many like the security and do not want to re-mortgage every couple of years.”
But, people are still attracted to the lower immediate costs of a short-term fixed-rate mortgage. If you consider only the best deals on the market for a £200,000 mortgage over a period of 25 years with currently expected variable-rates, the monthly cost of a 2-year deal is around 85% of that which would be expected for a 10-year deal. This however does not include the previously mentioned lender’s fees, or the situation where rates become high unexpectedly.
Of course, whether you will accept this risk should heavily depend on how much you feel capable of planning far into the future. If you have a predictable income, and are unlikely to change job or house for the coming decade, these long fixed-term mortgages could be a great choice. Risk-averse borrowers should really give them some serious consideration.
Regardless of which camp you eventually fall into though, it is important that you keep well-versed on early repayment charges, as well as the ‘portability’ of each mortgage plan. Circumstances change unexpectedly all the time, so you do not want to find yourself falling into an expensive trap.
If you do both of these you can at least be happy that you were able to make a fully informed decision.
Sources: The Sunday Times