Repayment or interest-only, discount or tracker, fixed or variable, stick or switch....
When it comes to choosing a mortgage the choices seem endless. So making a decision which could lead to a 25-year commitment is not one to be taken lightly. With some 25-year fixed rate deals, this is exactly what you'll be doing but is it wise to tie yourself in for the life of your mortgage?
Well the Chancellor certainly seems to think so having recently given his backing to plans for widening the availability of long term fixed rate mortgages. But for now, the 25 year fixed-rate deal remains a pretty niche market with only seven lenders getting in on the act.
How Competitive Are 25 Year Fixed Rate Mortgages?
There's no doubt long-term mortgages are more expensive than many current shorter fixed-rate deals. The cheapest two year fixed rate is from Norwich & Peterborough at 4.69% while Kent's Reliance's 25 year fixed rate lags behind at 5.50%. But there are some competitive deals out there if you like the idea of fixing your rate over the longer term.
If you go for a long-term fixed rate, you may be paying a little over the odds right now. But should interest rates rise over the term of your mortgage then you may end up with a pretty good deal overall. What's more, your repayments will always be protected from any future rate hikes and you'll never have to worry about payment shock!
But second guessing movements in interest rates is a gamble and you'll need to think twice whether a long-term fixed rate could work to your advantage before you take the plunge.
So, what's on offer now?
The table below shows nine deals which are up for grabs now. As you can see five of these only require a 5% deposit, and the fees don't appear any more severe than shorter term loans.
Most importantly, these 25-year fixed rates are all portable which means when you want to move house you can take your mortgage with you. If you're thinking long term, make sure your mortgage will go wherever you go.
25 Year Fixed Rate Mortgages
Lender | Rate | Period | Loan To Value | Fee | Tie-in |
|---|---|---|---|---|---|
Cheshire BS | 6.14% | 25 years | 95% | £899 | 1st 20 years with no penalty windows every other August from 2012. |
Co-operative Bank | 5.95% | 31.1.33 | 95% | £599 | To 31.1.18 |
Kent Reliance | 5.50% | 25 years | 75% | £995 | 25 years |
Kent Reliance | 5.98% | 25 years | 95% | £595 | 25 years |
Manchester BS | 5.74% | 30 years | 85% | £895 | First 10 years |
Nationwide BS | 5.98% | 25 years | 90% | £599 | First 10 years |
Nationwide BS | 6.58% | 25 years | 95% | £599 | First 10 years |
Norwich and Peterborough BS | 5.79% | 30.4.33 | 90% | £385 | To 30.4.18 |
Scarborough BS | 5.89% | 29.4.33 | 95% | £695 | To 29.4.18 |
Source: Moneyfacts.co.uk 13.2.08. All mortgages shown are portable.
Pay attention to the tie-in period. I mentioned earlier that this type of mortgage involves a 25-year commitment but this isn't always the case. In fact, only one lender - Kent Reliance - applies an early repayment charge (ERC) which lasts throughout the entire 25 year period. Most other lenders will allow you to switch after ten years without clobbering you with an ERC.
What's more, if interest rates are higher after the tie-in period has ended, you'll have the option to stay put and continuing enjoying the same fixed rate.
That said, a decade is a long time and it's difficult to anticipate your needs and changing circumstances for such an extended period. What happens if you lose your job, become ill or your relationship breaks down?
I don't mean to be pessimistic, but if you need to sell up and get out, the ERC can really hurt. In Nationwide's case, if you have to redeem your mortgage in the first ten years, you'll be charged a 3% fee. That means if you have an outstanding balance of say, £150,000 the ERC will set you back a whopping £4,500.
But, on a more positive note, this could be offset by the thousands you could save in legal, valuation and arrangement fees, because you won't have the expense, not to mention the hassle, of continually re-mortgaging every few years to chase new competitive deals.
It's true Long-term fixed rate mortgages won't suit everyone, especially those of us who need more flexibility. But I still think they have their place. If you don't want to worry about interest rates and constant re-mortgaging, the stability they offer could be right up your street.
More: True Cost Of Buying A Home | The Motley Fool Mortgage Service could find you a mortgage deal that is right for you.