The Mortgage Clinic: 'Should I get a rate that's fixed for life?'
Wednesday 04 April 2007
Q. 'I'm on a tracker mortgage now and have felt the pain of recent interest-rate increases. I've seen that I can now have a mortgage fixed for as long as 25 years. Is that a good idea? It would be reassuring to know that there is no way my mortgage payments could rise any further, but have I missed an important snag?'
A. Very long-term fixed-rate mortgages are more common in other countries, including Germany and the US, than they are in the UK. But several banks and building societies here have launched mortgages with a fixed rate for as long as 10, 15 or even 25 years.
Nationwide announced a 25-year fixed rate last week. The building society is charging 5.49 per cent for homebuyers with a 10 per cent deposit, and 5.59 per cent for homeowners who are remortgaging. These rates are not unreasonable, given the recent rises in the Bank of England base rate. However, observers do believe that base rates will start to come down again later this year - this is one reason lenders are able to offer attractive deals on longer-term rates.
Taking out such a mortgage does, however, mean committing yourself to the lender for a significant period. As a result, some mortgage experts are cautious.
"It is ludicrous to allow yourself to be tied into a contract for this length of time, even though the product has no early redemption fees after 10 years," warns Louise Cuming, head of mortgages at the financial website Moneysupermarket.com. "Not only this, but interest rates are expected to start reducing next year, so it makes no sense to commit to what is potentially a high rate of interest."
There are other long-term fixed rates on offer, including from Kent Reliance, Cheshire and Newcastle building societies. But these have longer tie-ins than the Nationwide, which only requires you to stay with them for 10 years.
However, as Julia Harris, mortgage analyst at the financial researchers Moneyfacts points out, few people will want a 25-year mortgage. Someone who already has a mortgage and wants to switch is unlikely to want a new 25-year term. And a first-time buyer probably won't want to be tied in for such a long time.
In terms of snags - and this applies to any fixed-rate mortgage - you should look at the redemption penalties, whether you can make any penalty-free overpayments, whether the mortgage is "portable" if you move house and the arrangement fee.
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