Rising interest rates: will a 15-year mortgage solution protect homeowners?

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The ups and downs of the pandemic have left many searching for certainty – and new figures show that desire extends to their mortgages too.

Four in five said they would be willing to take a fixed rate for more than five years, in exchange for the peace of mind that their monthly payments would not change for seven, 10 or even 15 years.

They said they would be willing to pay up to £1,200 for the lien, according to research from lender Kensington Mortgages.

Mortgages are usually taken out for two or five years – but it is possible to fix for much longer

Typically, people take out two- or five-year fixed rate mortgages. After that, they can remortgage on another fixed agreement with the same or a different lender.

If they don’t, their lender puts them at their higher “standard variable rate” for the rest of the term – usually around 25 years. This rate can go up or down.

But locking yourself in longer has become more popular. According to a Bank of England study in 2020, mortgages with five-year long-term solutions now account for half of new mortgages – although the vast majority of these are five-year solutions rather than longer chords.

“Part of this is due to changes in affordability and the ability to borrow more over a fixed five-year period due to stress testing, but the average costs between the two have come down, making the five years longer affordable”, explains Nick Mendes, technical manager of mortgage loans at Jean Charcol.

Beyond this period, mortgages are readily available with fixed periods of up to 10 years.

There are a handful of 15-year agreements on the market, and there’s even a product, Habito One, that allows borrowers to fix up to 40 years, but at a high interest rate.

LONG FIXED RATE MORTGAGES: BEST BUY
Lender Fixed length To pay Rate Costs Annual cost for
£200,000 home*
Barclays 7 years 40% 1.39% £999 £5,828
Yorkshire BS 7 years 35% 1.70% £495 £5,966
Skipton BS 7 years 25% 1.99% £0 £6,096
Barclays 10 years 40% 2.07% £0 £6,153
blank silver 10 years 35% 1.95% £883 £6,157
blank silver 15 years old 35% 2.55% £883 £6,555
*Based on a 25 year term

These products have not always been popular. However, mortgage rates have hit historic lows in recent months, which could make the idea of ​​fixing a rate for the next decade attractive.

This may look particularly attractive given that there are rumors of a Bank of England base rate hike – which would lead to higher mortgage rates – possibly as early as December.

“As we enter an era of rising rates, borrowers will be asking the question, ‘Do I need to repair longer,'” adds Mendes. a household – his mortgage – is natural.”

When This is Money asked mortgage brokers if they recommended solutions over five years old for their clients, opinions were mixed.

Robert Payne, director of Langley House Mortgages, says he can see the benefits.

“Long-term solutions are probably the most undervalued and undersold product on the market right now,” he says.

“Many owners are unaware of the benefits these products can provide, especially at a time when rates are at an all-time low. They are definitely worth considering if you have a [big deposit] and plan to stay in your property long term.

Locked in: Those with large deposits could get a longer fix if the Bank of England's base rate rises - but only if they're sure they don't want to move

Locked in: Those with large deposits could get a longer fix if the Bank of England’s base rate rises – but only if they’re sure they don’t want to move

Among the attractions of a longer term is that they can usually borrow more, because knowing what the mortgage payments will be for many years makes it easier to pass the lender’s stress tests.

Being on a ten-year contract also gives owners more security if their income should change in the short term – for example if they lose their job or become self-employed.

“Lenders assess affordability against criteria at the time of application, so if you’re looking to change professions or change employment status, tying you to a longer-term deal could give you the stability you need to adapt to those plans,” Mendes says — though he stresses that they need to make sure their mortgage payments stay affordable.

They’ll also save on fees, because a longer fix means they won’t need to keep paying arrangement, appraisal and attorney fees on a mortgage every two or five years. Arrangement fees are now up to £1,500 in some cases.

But repairing for more than five years isn’t for everyone.

First, the cost of the mortgage will generally only be competitive with standard two- and five-year rates if the borrower has a large down payment of at least 25%.

For example, the cheapest two-year patch for someone with a 60% deposit is 0.86%, while the cheapest patch is a seven-year contract at 1.39%, a difference just over 0.5 basis points.

But for those with smaller deposits, it doesn’t make as much sense. The cheapest two-year rate for someone with a 10% deposit is 1.74%, but the cheapest ten-year rate is 3.89%, a difference of 2, 25 basis points.

It’s impossible to predict exactly how much interest rates will rise and when, so going longer always involves an element of the unknown.

While unlikely to fall below their current levels, the slightly higher cost of a longer patch could be offset if rates for two- or five-year patches don’t increase much.

Cost aside, the most important thing a homeowner considering a longer term solution should ask themselves is what their life will be like at the end of that term.

What if you end up living next door to the neighbors from hell? The pitfall of a 10-year fix is ​​that you’re stuck with that deal if your circumstances change.

Rhys Schofield, Peak Mortgages and Protection

Most brokers don’t recommend a long-term solution for those who think they might need to move, for example, as the mortgage can rarely be ‘transferred’ to another home.

Lewis Shaw, founder and mortgage expert at Shaw Financial Services, says the situations where it can work are for a family with kids in school who know they don’t want to move out until they’ve finished school – or for an older couple who only had seven, 10 or 15 years left on their mortgage.

But he says he sees many customers struggling to stick to even a five-year solution after a few years.

“We see so many people who sign on for five-year contracts and then want to move in between them,” says Shaw.

And even a landlord doesn’t think they’ll move when they take out the loan, warning that a lot can happen in a decade.

‘The reality is that a very long-term solution might be a good idea if you’re sure you won’t be moving in the long term, but who can honestly say they know exactly what they’ll be doing 10 years from now?’ asks Rhys Schofield, managing director of Peak Mortgages and Protection.

‘What if for example you end up living next to the neighbors of hell? Because the pitfall of a 10-year fix is ​​that you’re stuck with that deal if your circumstances change.

“Very often there are huge prepayment charges for exiting a deal early, and no guarantee that the mortgage can be transferred to an alternative property”

Leaving a fixed rate mortgage early can result in huge costs, often 5% of the loan value

Leaving a fixed rate mortgage early can result in huge costs, often 5% of the loan value

Exiting the mortgage early can result in huge costs – often up to 5% of the total amount borrowed – although some offers have a sliding scale that reduces the length of the mortgage, often ending up as low as 1% of the mortgage. loan amount.

There are also 10-year fixes that have the same prepayment charges as five-year fixes – as Joshua Gerstler, Certified Financial Planner and owner of The Orchard Practice points out.

“TSB currently offers a 10 year fixed rate mortgage at 2.19% but the nice thing is they won’t charge you a prepayment fee if you want to leave after year 5” , he said. ‘You get the certainty of a 10-year fixed rate with the flexibility of a five-year rate.’

Borrowers will also want to check what their mortgage overpayment restrictions are. Many transactions allow up to 10% of a given year’s balance.

With a longer solution, it would take longer for you to pay off your mortgage through overpayments – as those with shorter transactions could come to the end of their solution and then switch to a standard variable rate where they could repay without penalty.

Anyone considering a longer solution will ultimately need to have an idea of ​​where the base rate is heading and calculate what that would mean for their monthly payments under a variety of different scenarios.

Consulting a broker that covers the entire market can help, but as last year showed, anything can happen.

Absent a crystal ball, it will ultimately be up to borrowers to decide whether or not they are comfortable committing to a mortgage for a decade or even longer.

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