Should you nail a low mortgage rate down?
With borrowing so cheap, Kate Hughes asks if fixes of 10 years or more are a case of making hay while the sun shines
Sunday 15 February 2009
The remarkable fall in interest rates has left people on tracker mortgages rubbing their hands with glee.
But as fast as rates have dropped, so they could rise, mortgage experts warn, tempting some homeowners to call the bottom of the market and pile into fixed-rate deals as their existing arrangements end. Most people go for two or three-year fixes to lock in a low cost of borrowing, but is there money to be saved by nailing a mortgage down for five or 10 years, or even longer? Or is it a huge mistake to tie yourself to what could prove a highly uncompetitive deal?
With the base rate at its lowest level since the Bank of England was founded in the 17th century, mortgage deals, at least for those who are particularly creditworthy, are very low. But at least one prominent high-street bank has said it will no longer pass on further base rate reductions to customers, and many people reckon this is as low as most rates will go. What's more, if the UK's economic past holds any lessons, it is that huge government borrowing – as we are seeing today – leads to higher interest rates in the future.
Against this kind of backdrop, it is no surprise that fixes are becoming increasingly popular. Among the best two-year deals on offer is the 3.49 per cent from Royal Bank of Scotland, with a maximum loan-to-value (LTV) of 75 per cent and a fee of £799. This is slightly higher than some of the other types of mortgage available today, but the idea is that over the fixed period, rates in general will rise about that level, so ultimately you save money.
But in that case, might homeowners be missing a trick if they don't fix for longer now that interest rates are so low? Locking yourself into a deal for a decade, for example, will make long-term budgeting far easier, with the potential for a nasty and sudden increase in your rates banished to far in the future. And with such an extended duration, you avoid having to pay out fees for remortgaging every few years. These can often be set at £1,000 or more, along with the additional legal and valuation costs.
"The advantage of a fix for five, seven or 10 years is that it will buy you peace of mind for a good length of time without tying you in for too long," says Melanie Bien, director of mortgage broker Savills Private Finance. "And if you have a deal on a high LTV, this might be particularly useful as property prices are likely to fall further before they stabilise. If you opt for a two-year fix, you may struggle to get another attractive rate when you remortgage as your LTV could be even higher and lenders may not have returned to this market."
Longer fixes may be well be set above the current base rate, but they are still historically very low and fees are comparable to most other mortgage arrangements. The best five-year deal available at the moment is from Alliance & Leicester, which is offering 4.44 per cent on a maximum LTV of 60 per cent, though the product comes with a restrictive maximum loan of £100,000 and a fee of £1,499. For both seven and 10-year fixes, Skipton building society offers a rate of 4.79 per cent at 60 per cent LTV and £895 in fees.
But if you're locked into a long-term mortgage, you could have an expensive problem if your personal circumstances change and you are forced to redeem your loan early. Fees for early repayment can be set at such a level that the interest you would have saved over the years is wiped out. You could even be left out of pocket.
"Early repayment charges are certainly one of the big disadvantages of fixing for longer than two or three years," Ms Bien warns. "Shorter deals are so popular because borrowers welcome the flexibility as they know what they will be doing during that time. This is not always the case with a longer deal so don't fix for 10 or 15 years if there is a strong possibility that you will move house inside two years."
At the extreme end of the scale, 25-year deals have long been championed by Gordon Brown and Alistair Darling (pictured) as a way of protecting consumers from fluctuating interest rates. In 2004 the Government commissioned a report on the mortgage market that identified selling more 25-year fixes as the key to bringing long-term stability to the housing market. Post credit crunch, this has proved a hollow aim as the number of 25-year deals has shrunk to almost zero, with lenders not willing to spend money marketing what has proved a very marginal product.
What's more, a very long-term lock-in like this means there's even more time for things to go wrong, warns David Hollingworth of broker London & Country Mortgages, and not just in terms of early repayment charges.
"The 'portability' of this type of mortgage can cause tremendous funding problems for people wanting to move house, especially for those who want to upsize," he says. "If you need additional borrowing, you may be limited to what your existing lender is willing to advance to you, if anything.
"It could be a case of giving up the property you want to buy, or paying huge penalties to get out of your deal."
In fact, Kent Reliance building society is the only lender still offering 25-year deals, currently 5.98 per cent for a £995 fee, and a 3 per cent early repayment charge for the full 25 years.
But Mr Hollingworth is a fan of 10-year fixes: "The premium people are being asked to pay for a 10-year deal isn't that much and there is plenty of choice out there."
Meanwhile, in light of the recent rate cuts, the interest on 25-year products can mean existing customers are paying well over the odds. In fact, those who took Mr Brown's advice are down thousands of pounds after only four years, says Louise Cuming at price-comparison site Moneysupermarket.com.
By 2011, a borrower who took out a 25-year fixed-term mortgage of £100,000 in 2007 can expect to be £4,200 worse off than someone who got successive two-year fixes, according to the website's figures. "Many of those people who listened to Gordon Brown must be crying into their porridge each morning," adds Ms Cuming. "It underlines the danger of locking yourself in so long into the future.
"Borrowers on a 25-year deal must now be wondering whether to stick with a mortgage at around 6 per cent and watch their savings rates dwindle, or to take the unsavoury step of paying an early redemption charge of at least 3 per cent of the value of their mortgage."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Bargain Hunter: Our exclusive deal cuts the cost of buying foreign currency by 20 per cent
Five Questions On: GB Energy's new tariff
Simon Read: 'Taylor Swift tickets purchased on Viagogo were cancelled hours before the concert'
Bank-beating exchange rates on your international payments
- 1 Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
- 2 James Blunt was special guest on the highest-rating Top Gear episode ever
- 3 People all over the world are getting semicolon tattoos to draw attention to mental health
- 4 Van driver who comforted Clark Carlisle and called 999 after suicide attempt dies age 24
- 5 Baby rescued 1km out to sea after parents forgot about her
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.