The long-term vs short-term fixed mortgage dilemma
Does it make more sense to go for a short-term fixed rate, and shop around for a cheaper deal in a couple of years, or secure a decent rate for the long term?
Today's debate is on the length of your fixed rate period. Should you shop around every couple of years for a better deal, or take the security of a decent rate for a longer period?
We asked Phil Cliff, director of mortgages at Santander, and Nick Cooper, mortgage advisor at lovemoney.com
Phil Cliff, director of mortgages at Santander
Take advantage of record short-term rates
We have seen a significant increase in the number of customers taking out shorter term fixed rate mortgages in recent months. It has been said that financial freedom comes from having your heart and mind free from worry about the ‘what-ifs’ of life. This is never truer than when an economy is gently balancing on a fine line between growth and recession.
For homeowners, this search for greater financial certainty means that many are now turning to fixed rate mortgages to enable them to better manage their monthly outgoings, removing the uncertainty that comes with a variable rate mortgage. With the Bank of England base rate really only having one direction it can head in the future – upwards – there is no longer the potential for borrowers to benefit from future downward movements in base rate in the same way as they have done over the past couple of years, during which base rate fell to its current record low of 0.5%. This is leading to a gradual shift away from tracker mortgages.
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The good news for homeowners is that competition in the short term fixed rate mortgage market has increased significantly in recent months to meet this demand. So much so, that according to the Bank of England, the cost of short-term fixed rate mortgages fell to a record low during June. The average rate charged on a two-year fixed rate deal for someone with a 25% deposit dropped to 3.67% during the month, down from 3.78%, the lowest level since records began in 1995.
So that just leaves the question of why homeowners looking for the security of a fixed rate would choose to opt for a shorter term fix over a longer term deal. Ultimately, it’s down to customer choice and many borrowers simply prefer to lock into a shorter term fix rather than a longer term deal.
However, all customers choosing any mortgage should consider what they might do at the end of any incentive period.
In today’s difficult economic climate, and with interest rates expected to rise in the short to medium term, our view is demand for fixed rate mortgages, including shorter term fixed rate deals, will continue to grow.
Nick Cooper, mortgage advisor at lovemoney.com
The longer the better!
If you’re undecided about whether to take a short or long-term fixed rate, you’re certainly not alone. While short-term deals offer you a lower rate to begin with, longer-term deals offer you more stability, and still at a reasonable price. If you are of a cautious nature when it comes to your finances then paying a little more for a long-term fixed may well be the option for you.
One of main benefits of taking a long-term fixed rate (5 years plus) is you can budget for that length of time. If you can afford it now, subject to your income staying the same, you should still be able to afford it throughout the term of the fixed rate.
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If you take a shorter-term deal, you could find that when it’s time to remortgage, rates will have increased. If your budget was tight before, you could find yourself faced with repayments beyond your means when your deal ends.
No one likes paying fees, but lenders like to charge them!
At present the average arrangement fee is around £999; this has increased over the last few years, and has the potential to continue to do so. Most lenders will pay the legal and valuation fees if you are remortgaging at the moment, but what’s to guarantee they’ll still be doing this in the future?
The reality is that in two years you could be expected to fork out even more to secure yourself another fixed rate. With a five-year deal (or more) you won’t have to pay another fee until your deal ends, which could potentially save you thousands.
Fixed rates are becoming more and more flexible, with lenders identifying that customers’ circumstances rarely stay the same for long. When you tie into a fixed mortgage deal, you’re normally only committing to keeping your money borrowed at that rate for the agreed time. Most lenders now allow you to overpay by a certain amount to allow you to reduce your mortgage and hence the interest charged.
Plus the majority of lenders will allow you to ‘port’ your mortgage to another property without incurring any early repayment fees. So you’re tied to the mortgage not the property.
Everyone is different and some won’t be happy paying a higher initial rate but if peace of mind is what you’re after, it might be a small price to pay to secure a longer-term fixed rate.
So what do you think? Be sure to share your views via the comment box below!