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Why long-term fixed-rate mortgages aren’t the answer

07.12.2011

Should we all be opting for 30-year fixed-rate mortgages? Housing minister Grant Shapps thinks so, as he becomes the latest politician to call for lenders to offer longer fixed-rate deals.

But are borrowers interested? Research from the Council of Mortgage Lenders suggests not, with 1.8m borrowers coming to the end of a fixed-rate deal moving onto their lender’s standard variable rate (SVR), rather than choosing another fix. More than half of these borrowers have more than 10 per cent equity in their homes so could remortgage if they wanted but are waiting to see what happens with interest rates.

While politicians argue that longer-term fixes give stability to borrowers and the housing market, when borrowers do opt for fixes, they tend to prefer two, three or five year deals. Fix for longer – and need to move for whatever reason – and you incur a hefty early repayment charge.

For borrowers on one of the cheapest SVRs, staying put can make a lot of sense. But it depends on your lender: while some borrowers enjoy SVRs of 2.5 per cent, those with some of the smaller building societies could be paying more than 6 per cent. If the latter is the case, you are likely to be better off remortgaging onto a fixed rate.

Much depends on what you think will happen with interest rates and whether you need the certainty of a fix. Although interest rates have been held at 0.5 per cent for two and a half years, and inflation is at 5 per cent – well above the government’s 2 per cent target – it is unlikely that interest rates will rise anytime soon. Some economists believe they won’t start rising for a couple of years, and that once they do, it will happen slowly, because of the fragility of the economy.

It is also worth bearing in mind that while fixed rates are at all-time lows, they won’t stay there forever. Barclays recently increased its fixed rates on the back of the increased cost of funding, while Bank of Scotland raised its SVR for the same reason so borrowers need to be vigilant.

Whatever your situation, whether you are coming up to remortgage or buying a property, it is vital to seek independent advice to ensure you don’t pay more than you need to, particularly if you are looking for funding of more than £1m. While the high-street lenders continue to regard complicated income streams and interest-only requests with suspicion, the private banks are comfortable in this space for the right client. Rates continue to be competitive when viewed alongside the mainstream offerings although if you really want a 30-year fix you are likely to be disappointed.

Jonathan Harris
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Jonathan Harris
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