Property mortgages: Is now the time for a long-term fix?
Tempted by the idea of locking into a fixed-rate mortgage for 30 or 40 years to take advantage of a lower rate?
Demand for longer-term fixes has never taken off to any great degree before, due to the fact most borrowers don’t wish to be tied in for that length of time.
But with expectations that the era of low interest rates is coming to a close – and that the only way is up – some borrowers are being enticed by the low rate and long-term certainty that such rates offer.
In November, Kensington Mortgages launched a new ‘Flexi Fixed for Term’ deal where borrowers can choose to fix for between 11 and 40 years, with rates ranging up to 3.34% for a 40-year fix at 60% loan-to-value (LTV).
Rates are higher on the larger LTVs.
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This follows in the footsteps of a home loan launched earlier this year by Habito, which also offers a fixed rate for up to 40 years.
But while locking into an interest rate for the entire duration of the mortgage term may sound appealing, does fixing for this long make sense?
Hard to know what the future will bring
Historically in the UK, there has been very little demand for such long fixed-rate home loans.
Mark Harris from mortgage broker, SPF Private Clients, said: “Most borrowers looking for the security of a fixed-rate tend to opt for two or five years because rates are lower, and that is the maximum length of time they are happy to commit for.”
This is a view shared by Andrew Montlake from broker, Coreco.
He said: “Thinking five years ahead is difficult for many, let alone, 10, 20 or 30. Coupled with this is the fact five-year fixes have always been slightly cheaper. As a result longer-term fixes have bypassed most borrowers who will only pay a certain amount more for security.”
Are things changing?
For some time now, governments have called for lenders to offer long-term fixed-rate loans.
As part of his election manifesto, Boris Johnson pledged to make it easier to get 20-year and 30-year fixed deals, which are already very popular in some parts of continental Europe, such as Germany.
With borrowers expecting mortgage rates to get hiked up as and when the base rate increases, the launch of new deals which run for a few decades is certainly timely.
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Montlake said: “As we are sitting in such a low-interest rate environment with the expectation that rates will start going up some time soon, borrowers may be tempted by the additional level of security and peace of mind these longer-term fixes bring.”
New products will also reignite the debate about whether fixing for the longer-term makes good sense.
Who would suit a long-term fix?
Longer-term fixes could be attractive to borrowers looking to remortgage who have a good level of equity in their property – and no expectation of moving over that time period.
In fact, if you move to a 30-year or 40-year fix, you may not have to remortgage, in some cases, ever again.
This would mean big savings on arrangement fees.
Harris said: “You are locked in at the rate you take the mortgage out for, so, if interest rates were to rise, it wouldn’t affect you. You can budget for the future, safe in the knowledge that nothing will upset the apple cart.”
Other borrowers who might want to consider a long-term fix include purchasers who have a high deposit on a long-term family home, as well as those trading down for a last move.
Watch out for ERCs
That said, one of the big downsides of fixing for the long term is that if you do need to get out of the deal early, you risk an early repayment charge (ERC) running into thousands of pounds.
With this in mind, before locking into one of these mortgages, you need to check what the lender will charge you if your circumstances change and you need to exit.
With the Kensington deal, if you need to get out of the mortgage you could face ERCs of 7% of the outstanding mortgage. But there is some flexibility.
Montlake said: “What is most interesting about this new Kensington product is that not only is it more realistically priced than similar products already available, but the penalties are not applied under certain conditions. This includes, for example, if you are selling, moving home, or if a life event, such as critical illness or death occurs.
Choose a fix – but only fix for as long as makes sense
With interest rates seemingly on the way up, a fixed-rate term makes sense if you would struggle to pay the mortgage if rates were to rise.
But the key is not to fix for longer than you are absolutely sure about.
While having certainty on your repayments may be very appealing, you risk ending up paying more than you would with a shorter-term fix.
Make sure you’ve done your research before committing to any deal.
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