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Fixing your mortgage for the long term: why you should proceed with caution

02.02.2012

While a number of lenders have been busy raising their rates this week at very short notice (thank you Nationwide), there are others that have been moving in the opposite direction, with quite startling results.

Over the past week, we’ve seen the cheapest ten-year fix – ever – at 3.99 per cent, from Norwich & Peterborough. And we’ve also seen the cheapest five-year fix – ever – at 3.19 per cent from Chelsea Building Society. So what is going on? Why are some lenders raising their rates while others are offering the best deals we have ever seen? And, more importantly, should you be opting for a fixed rate?

Cheap Swap rates (the rate banks pay to borrow from each other) are enabling these lenders to offer such impressive deals. When the price of fixes falls, it means interest rates are unlikely to rise anytime soon. We wouldn’t be at all surprised if there was no movement in interest rates in the next couple of years. But while that weakens the arguments in favour of a two-year fix, a longer-term fix might make sense. If you qualify for one of these deals (you need a 25 per cent deposit for the ten-year fix and a 30 per cent deposit for the five-year version), and don’t plan on moving during the fixed-rate period, they could be a very good option indeed.

Let’s be frank; these are brilliant rates. But if you don’t know for absolute certain that you will be in the same property five or ten years from now, you should avoid like the plague. You might be able to port your mortgage to a new property if you move during the fixed term but this will depend on various conditions being met at the time. There are hefty redemption penalties if you don’t so make sure you only commit yourself if you are certain about not moving.

For those who don’t know and require some flexibility, a base-rate tracker may be a better option than a two-year fix. The initial pricing is better than on fixes and if interest rates don’t rise in the next couple of years, as many economists are predicting, you won’t see increased mortgage payments.

It’s also worth considering that while Base Rate may stay low, lending margins are likely to increase over the year due to the EU banking crisis. These increased costs will be passed onto borrowers – indeed, we are already seeing some lenders do this. It may therefore be worth remortgaging now, rather than waiting, and perhaps opting for a longer-term fix if circumstances allow.

Adrian Anderson
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Adrian Anderson
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