10-year fixed-rate mortgages have been reducing significantly in cost, and for the first time in the UK, it’s now possible to get a pretty competitive rate fixed for ten years. But the big question is should you get one?
Question 1: Is a fixed rate even appropriate for you?
Forget ten years. Should you even have a fixed-rate mortgage?
Lots of people get caught out by significant early repayment penalties due to not properly considering the question of their long-term plans before buying.
Will you be moving home, repaying large balances early, hoping to raise significant additional finance from the property or could you be eligible for better deals in the short term if your circumstances improve?
Before considering a fixed-rate mortgage, look at our guide to fixed-rate products and see how they work versus other rates. Pay real consideration to whether the points above could leave you paying redemption penalties of many thousands of pounds.
You should speak to an independent mortgage broker like us as well.
Question 2: Will fixing for ten years be competitive long term?
If you had a crystal ball, you could answer this question, but no one can see into the future.
When a lender prices a product, it’s either based on the cost of borrowing that money from another bank or investor and turning it into mortgages, or on the expected interest rate they will pay to their depositors over that time.
So the simple fact is that a fixed-rate mortgage will be priced based on the expectations of what will happen to interest rates over the term & the lender will expect to profit.
That means the current glut of competitive long-term fixed deals indicates that the banks expect a prolonged period of relatively low-interest rates in the UK well into the future.
So like odds given by bookies, most banks will not expect average interest rates over the fixed period to be higher than the rate they are offering you. So you are in effect betting against the bank, but they have been known to be quite spectacularly wrong in the past.
The smaller your mortgage though, and the shorter the remaining term (for someone on a repayment or capital and interest mortgage) the less differences in rate will impact the long-term cost.
Because of this, for each loan, there will come a point as the remaining term decreases when small differences in rates are outweighed by the repeated fees involved in refinancing a mortgage, and changing products regularly offers poor value for money.
This is very case-specific, but once your mortgage reaches that point the potential downsides of long-term fixes may become insignificant.
Question 3: So, who should take a 10-year fixed-rate mortgage?
If you are concerned about increases in costs, have no circumstances that might better suit variable rates, and are sure that the early repayment penalties won’t be likely to cause an issue, then you need to decide whether you feel it’s worthwhile gambling long term and risk paying more than you might need to, or whether to take a short-term product in the hope that you can secure another competitive rate again in a few years.
This decision is mainly going to come down to the margin between short-term fixed rates and long term ones. Also, the probability that changes to your circumstances make better deals available to you in the short term (such as better income making more competitive lenders available, or works to a property decreasing your loan to value), and whether you feel the additional cost is good value for the extra security.
A mortgage advisor such as ourselves will discuss your circumstances with you and give guidance on whether a fixed product is more appropriate for you. If a fixed rate is the best option for you, but it comes down purely to a decision between long and short-term deals then this is very much a decision best made by the customer, but at least we can present you with the best options available over the different periods so you can make a more informed decision between them.
If you’d like to know what the best deals available to you both in the short and long term could be then complete our enquiry form and an advisor will contact you, to discuss your options and provide you with advice.
The Woolwich announced several new fixed-rate products yesterday, which herald the return of low-fee, low-rate mortgage products to the market, and are a pivotal moment in the UK’s turn from recession to recovery.
The rates, which include a two-year fixed at 3.89% available up to 70% loan-to-value, and 4.09% up to 75% loan-to-value, have an application fee of just £199, free valuation and legal work on remortgages or £200 cash back towards legal costs if using your own solicitors. Early repayment charges apply of 3% until 31/01/2012, and APR for both products is 2.8%.
They have also included a three-year fixed product at a similarly competitive rate.
That is a big departure from the glut of products currently offering headline rates with either £995 or even 2% arrangement fees and will kickstart the lending industry back into competitive pricing with more than just on-paper rate cuts.
The products are also available on new purchases and equally competitive in that space, although standard valuation and legal fees will apply on purchases.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. We do not usually charge a fee for mortgage advice, although you may pay up to 1.5% of the loan amount. Some buy-to-let and commercial loans are not regulated by the Financial Services Authority.
The Woolwich has responded to criticism around their stepped tracker rate, which, with a current headline rate of 1.98%, is one of the lowest rates available in the market.
I commented that the product was restricted to mortgages between £200K and £500K, severely limiting its market, when I announced the new rate here a couple of weeks ago. These restrictions have ceased as of today. The product is now available for loans between £5K and £1 Million.
Woolwich has not chosen to address the lengthy tie-in for five years with a 2% early repayment charge though, which could make the product very costly in the long term.
Instead, they have released a new lifetime tracker at the Bank of England Base Rate +2.29% with a £999 application fee available up to 70% loan to value, or at +2.69% with no fee again to 70% loan to value. The new products have early repayment charges of 1% for two years, making them much more favourable for some borrowers, but crucially both allow you to switch to a later fix without penalty if desired.
Both products would have a valuation fee of £295 for a purchase at 70% loan to value, with a mortgage of £100K and a lender Conveyancing fee of £126, giving an APR of 2.9% and 3.3%, respectively.
As usual, always read the separate Key Facts Illustration before deciding on a mortgage product, and to speak to a mortgage advisor, call 0345 4594490.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
We do not usually charge a fee for mortgage advice, although you may pay up to 1.5% of the loan amount. Some buy-to-let and commercial loans are not regulated by the Financial Services Authority.
In Q&A, we take a look at some of the questions mortgage advisers deal with regularly.
Question; what are the pitfalls and benefits of an interest-only mortgage?
They say life is all about risk; this question is a prime example.
If you want the certainty that your mortgage is repaid in full (providing you keep up your payments), then you should take a repayment mortgage.
However, if the cost is too high in the short term, you could take an interest-only mortgage and move to a repayment mortgage later, although you should be aware that the interest paid will be dead money and not reduce your debt.
If you take an interest-only mortgage in the long term, you are gambling that by investing wisely, you can outperform mortgage interest rates with your investments, producing a surplus by the end of the mortgage.
However, if your investment does not perform as planned, there will be a shortfall which you will have to find elsewhere at the end of the term.
But your investment must also outperform mortgage interest rates over the full loan balance; and the entire term.
Whereas if you take a repayment mortgage, the capital part of your payment would gradually reduce the interest element, so like for like, you will repay more interest over the term on an interest-only basis too.
Also, income earned from investments may be subject to further taxation, which increases the risks of shortfalls attached to interest-only loans.
That means interest-only lending on people’s primary residence is considered high risk and is harder to arrange.
On buy-to-let loans, interest only is commonplace. The reduced monthly payments give landlords more breathing space if a tenant fails to pay; allowing for the faster accrual of additional funds for other purchases.
Alliance & Leicester announced further rate reductions yesterday on their 75% loan to value two-year fixed rates for new purchases.
The new product, with a £995 arrangement fee and a fixed rate of 4.53%, sits alongside their 4.48% product with a 1% arrangement fee.
The new rate brings them into line with rates from Abbey, but this product could benefit those who have recently gone self-employed or started a business; Alliance & Leicester require only one year of accounts minimum against two from Abbey. It also has a free valuation, much like Abbey’s three-year fix at the same rate.
The move continues the trend of lenders moving their products down to a similar baseline, but with no one currently undercutting the rest of the market, unlike what we have seen with variable rates from HSBC and Woolwich, although; swap rates have not dropped in the same fashion as Three-Month LIBOR which fuelled the reduction in variable rates.
The new rates have an APR of 5.1%, and the reversion rate currently stands at 4.99%. Early repayment charges are 3% of the loan until 31/12/2011, and the lender’s Conveyancing fee is typically £189.
Always consult the Key Facts Illustration before deciding on a mortgage product and seek independent advice. To speak to a mortgage advisor, call 0845 4594490.
.
