Can Long-term Fixes Be Attractive Enough?
August 26, 2007
Prime Minister Gordon Brown and Chancellor Alistair Darling have called for more 25-year fixed rate mortgages to be available for borrowers. The Chancellor said he would make long-term fixed-rate mortgages easier to finance to assist lenders, who wonder exactly what changes he can make to make them attractive enough.
Long-term fixed rate mortgages give borrowers peace of mind as they know exactly what their monthly repayments will be for the whole term, no matter how much the Bank of England’s base rate is fluctuating, and if variable mortgage rates change around them, they won’t care.
The bad side of long-term mortgages are they are usually encumbered by heavy redemption penalties tying borrowers down, who might later want to change their mortgage, by moving house, for example.
On 17 July Nationwide Building Society will launch a 25-year fixed rate mortgage at 6.39% and a fee of £599 for new borrowers. Existing borrowers will only have to pay a £499, but for a rate at 6.49%. If you pay off the mortgage within the first ten years, the redemption penalty is 3%.
However, there are some existing 25-year deals that offer better value. Kent Reliance Building Society is offering a 5.98% rate for a fee of £495; Cheshire Building Society has a rate of 5.99% for a £899 fee; and there is a 5.99% for a fee of £895 from Manchester Building Society. These therefore come in at around 0.5% more than some two-year deals, such as Cheshire’s 5.49% and Stroud & Swindon Building Society’s 5.54% for a fee of £899.
Kent Reliance has a redemption penalty of 3% at any time during the 25 years. Manchester BS’s 3% penalty is only applicable for redemption in the first ten years. Their product is actually available for any period of 15 to 30 years. Cheshire BS offer interesting penalty free windows every two years for the first five years, when borrowers can redeem without penalty. The window lasts for three months and you must redeem within that period or be subject to the penalty which is 5% in the first four years, then dropping by 1% every four years. After 20 years there is no charge.
Experts advise borrowers not to fix for longer than have to unless they are comfortable with the exit fees. Circumstances of families change; incomes can go up or down; jobs move. Advice is to ensure that any long-term fixed deal is portable so that you can move it onto a new house if necessary.
It seems that, as yet, most people do not feel comfortable tying themselves down for so long, despite the stability on offer. There is of course, the very real chance that interest rates will come down again after they have peaked in the current cycle – likely to be at 6% or at worst 6.25% in early 2008 – at which point if you’re stuck on 6.39% for another few years while everybody else is re-fixing for another two years at 5.5%, you’d be looking to get out of your long-term deal.
Alan Wright
26th August 2007
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