Will you be better off with a 25 year fixed rate mortgage?
In response to increasing broker and lenders’ fees, and in an attempt to re-stabilise the housing market in the face of base rate uncertainty, the government has recently appealed for more long-term fixed rate mortgages to be made available to borrowers. The response from mortgage brokers has been divided, with many brokers claiming that long-term fixed rate products would mean higher rates and unaffordable exit fees, leaving many borrowers in any even worse position.
However, a selection of lenders have added to their mortgage products a range of long-term fixed rate mortgages, including 10, 15, and 25 year options, providing borrowers the option of stabilising their finances long-term.
Interest rates
The most important factor when considering a long-term fixed rate mortgage product is the interest rate offered on the loan. Considering rising interest rate trends over the last 12 months, it might seem attractive to fix your interest rate to protect your finances from insecurity with set monthly repayments. However, as the Bank of England rate rises, the mortgage industry responds to trends and predictions and protects itself by offering rates high enough to cover any future rises. Lenders will set the rate at such a level on a 25 year fixed rate mortgage to ensure that any future rate rises can be absorbed by the set rate, making the likelihood of obtaining a fixed rate mortgage at an affordable rate is much lower than obtaining a shorter term fixed rate product.
Flexibility
A 25 year fixed rate mortgage may be much less flexible than a regular 3-5 year fixed rate product. The option to remortgage for a better rate may be greatly reduced, which may leave you at a disadvantage if rates fall during the life of your mortgage. Lock-in periods will be much longer than on a short term mortgage deal, where the end of the lock-in period coincides with the end of the discounted rate deal; On a long-term mortgage, in return for the security against rate increases, your lock-in period could well extend to up to 10 years or beyond.
Long-term Prospects
Life is becoming more and more mobile. There is very little chance that your circumstances will not change greatly over the next 25 years; marriage, having children, divorce, employment changes and the loss of a spouse are all factors that will affect how you want to manage your mortgage. Locking yourself into a long-term fixed rate mortgage product will greatly reduce your freedom to respond to your changing situation and income to your best advantage; for the most part, most people may benefit more by being able to reassess their mortgage every 5-8 years to ensure that their money is going into the best mortgage option for their current financial and personal circumstances.
What to watch for
There are certain things to watch for if you are considering a long-term fixed rate mortgage option:
Mobility –
Ensure the mortgage is portable so that you can take it with you if you decide to move house in the future
Early repayment options –
Ensure that the lender provides the option for early repayment with little or no charge at certain points throughout the mortgage term. Some lenders may offer ‘exit windows’ allowing you to repay without penalty; others may offer a relatively short lock-in period, say 10 years on a 25 year mortgage, after which there are no early repayment charges.
Flexibility –
The option to make regular overpayments, underpayments, and payment holidays can make a big different to many borrowers, particularly those on flexible incomes; this can affect the interest charged, and as a result, the total mortgage cost.
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