Posted on Monday, September 9, 2019
With continued economic uncertainty, some lenders are introducing long-term fixed rate mortgages, for buyers wanting financial security, whatever happens to interest rates and the pound. But are these mortgages, last seen during the 2008 financial crisis, a sensible way to plan ahead or an expensive and risky gimmick?
Virgin Money announced its 15-year fixed rate product in July, with rates of between 2.55% and 3.75% depending on the loan to value ratio. It was followed by the Yorkshire Bank with rates of 2.79% to 3.65% and commentators expect more lenders to follow suit.
The main advantage of 15-year fixed rate is knowing, many years into the future, how much your monthly mortgage repayments will be. The downside is that rates are higher than with short-term fixed rate products and early redemption fees are steep.
According to David Hollingworth of London and Country Mortgages: “Longer-term fixed rates do carry higher interest rates than their shorter-term counterparts so there is a cost for long-term stability. That price may be well worth paying, of course, if rates rise in future.
“Although the majority of deals are portable – so they can be taken to a new property – there are no guarantees that the borrower will still meet the lender’s criteria, or what rates would be available on any top-up borrowing that might be required.”
Anyone taking out such a long-term fixed rate mortgage should be careful to check the fees. The Virgin Money product comes with an 8% early repayment charge for anyone paying off their loan before January 2025, which equates to £32,000 on a £400,000 loan. This could be an issue, even for people who have found their ‘forever home’ should the unexpected arise, such as redundancy or relationship breakdown.
But while 15 years might seem a long time to have a fixed interest rate, periods of 20 and even 25 years are not uncommon elsewhere in Europe.
As an alternative - some brokers suggest taking advantage of the low interest rates that can currently be found and paying off more of the mortgage to reduce the loan to value ratio; allowing you to find products with cheaper repayments should you decide to remortgage later.
Read more about this story in The Guardian.