In today's housing market, long-term fixed rate mortgages, where you fix the rate for the whole life of the mortgage (20 years or more), aren’t yet the norm. With ongoing uncertainty in the economy, they are starting to gain traction for providing peace of mind.
Long-term fixed mortgages are very popular in other European countries such as France, Germany, and in the US. As a result, many mortgage holders in those countries are not subject to the pain their UK counterparts are experiencing.
In a rapidly changing housing market, it’s essential to separate fact from fiction. We want to debunk some of the common myths and questions associated with long-term fixes.
Are long-term fixed-rate mortgages only useful for those who already have a mortgage?
Long-term fixes could be suitable for all types of borrowers including first-time buyers, those in or approaching retirement, as well as homeowners who already have a mortgage.
For first-time buyers, a long-term fixed rate mortgage can offer predictable monthly payments over the life of the loan, making budgeting more manageable and payment surprises a thing of the past. No need to remortgage unless or until you want to, no rising rates, no shocks.
This financial stability could allow borrowers a higher affordability boost compared with those taking out a short-term fixed rate mortgage. This is due to a borrower not needing to be ‘stress tested’ for future interest rate rises, allowing them to borrow more compared with leading high street offerings.
For homeowners, remortgaging to a long-term fix can help with long-term financial stability, meaning they can get on with their lives without worrying about their next refinance decision.
For those approaching or in retirement, short-term fixes create a risk that the individual can’t keep up with payments if this were to change in the future. Also, most high street lenders have end-of-term age caps limiting the length of the mortgage term which also means they have to be repaid more quickly.
As long-term fixed rate mortgages fix the payment for the whole mortgage term, these individuals may find long-term fixes a suitable product for their needs. Some also have no end of term age cap making payments more manageable as well.
What are some of the advantages of fixing for such a long period of time?
Stability and increased affordability. Payments on your largest and most important debt won’t fluctuate with interest rate volatility or product availability. This can be especially beneficial for homeowners on a tight budget and helps maximise borrowing without taking uncertainty risk.
However, like with any mortgage, its suitability will depend on your financial goals, your tolerance to risk, and the current macro-economic environment. So, it’s essential to consider all options before taking one out – this is where a good mortgage broker can help.
Do long-term fixed rate mortgages come with higher interest rates?
While a long-term fixed rate mortgage may have a higher rate than a two-year or five-year fixed rate mortgage, it may be helpful to think about the additional benefits received. For example, on a two-year or five-year fix, you need to consider the changes to your monthly payments when your fixed rate ends, or your circumstances change.
A long-term fix removes this risk and puts you back in control. Also, every time you remortgage you pay fees.
On the other hand, if market rates reduce over the medium term after you’ve locked in your rate, you may not benefit from those lower rates unless you refinance which may also incur a cost, so it’s something to bear in mind.
Are there penalties for paying off a long-term fixed rate mortgage early?
Early repayment charges (ERC) vary by lender. Some long-term fixed rate mortgages carry ERCs for a long time and are high. While others are stepped over time, so borrowers can have the certainty that their payments will never increase and that you can change your mortgage if things are better in the future.
It allows them to take advantage of lower rates in the future and change mortgage when the time is right.
However, it’s very important to understand what ERC charges may accompany your mortgage so you can feel prepared should your circumstances change.
What happens if I want to move or refinance before the term ends?
Long-term fixed rate mortgages are designed to fit around your life. You’re often able to take them with you when you move home, and with some you can refinance penalty-free after five years, offering flexibility and security.
Again, before taking on any mortgage, whether a short-term or long-term fix, it’s really important to discuss these options with your lender or broker.
Colin Bell is co-founder and chief operating officer at Perenna
