Fixed Rate Mortgages for the Long Term

by Mark Johnston

In 2007 when the Bank of England base rate was 5.5%, Nationwide and Halifax both launched 25 year mortgages at a rate of 6.39%. These mortgages were hailed as offering long term stability and flexibility for ‘borrower wanting to protect themselves against fluctuations in interest rates’.

Although no one could predict that interest would fall and stay so low, therefore those who did lock in to deals with rates of 6.39% for the long term got themselves in to troubled situations.

In reality these long term deals came with painful ‘get out clauses’, such as the fact that if borrowers  wanted to switch to better deals they were then faced with a 3% early repayment charge.

Normally these sorts of penalties last for just a few years, but on 25 year deals the charges meant that borrowers had to pay the charge until at least 2017.

Even in light of this situation the housing minister, Grant Shapps, currently feels that longer term mortgages such as those for 35 to 30 years are still a good idea. He added that “these could help families on tight budgets know exactly where they stand when buying a home”.

However, even though current interest rates are at historically low levels, long term fixes can still be pricey. The problem is that long term fixes do not price off the base rate instead they price off the swaps market. What this means basically is that borrowers pay lower rates for short term borrowing and higher rates for longer terms.

Paul Broadhead, head of mortgage policy for the Building Societies Association (BSA) states that “longer term fixed rate mortgages have been offered in the past but with limited consumer demand”.

Some data has shown that quite a few borrowers are however now adopting a longer term outlook, especially with the euro zone crisis still looming. Although the data does show that they are only considering 10 and 5 year fixes rather than 25 and above year fixes.

It seems that new deals are slowly increasing as the number of home owners looking for more security and peace of mind increases also.

The number of 10 year fixed deals on the market currently is still very limited as these deals are very much a niche product.

Norwich and Peterborough launched a 10 year fix back in January 2012; this was pulled however after just 2 weeks due to ‘unprecedented demand’.

Ten year fixes have rates of about 5% with hefty arrangement fees on top and they also carry 7% early repayment charges, but that is only if borrowers can raise at least a 25% deposit.

Many experts believe that younger home owners may be apprehensive about 10 year fixes as many have aspirations to climb further up the housing ladder.

There is a huge problem in the current economic climate, mortgage market and also the housing market which has forced potential first time buyers in to paying huge rents for much longer than ever before.

Therefore many experts believe that Grant Shapps should be tackling the rental market by controlling rent rises and regulating buy to let, instead of encouraging young adults in to ‘stupid’ 25 year deals.

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