Long term fixes may not be popular

The Prime Minister and the Chancellor have called for longer term fixed rates, such as 25-year deals. The Government is looking for more ways in which it can help mortgage lenders provide more affordable longer fixed rate deals, such as changes to the bond market to make longer term deals easier to set up.

However, the Government proposals, announced last week, have received a less than enthusiastic response. Experts in the field reckon that such loans are so far too expensive and too inflexible for most borrowers. There appear to be a number of reasons why these long term loans will not catch on with borrowers. One of the main reasons is that borrowers will feel locked into the deal for a long time (25 years) during which time any number of events could lie ahead for them which could change the course of their lives. The deals also offer little flexibility if borrowers need to move house or would like to redeem their loan. The final hitch is that these deals are still seen as far too expensive.

Most borrowers seem to like maximum flexibility and a low rate, such as those that can be found with two, three or even five year deals. The 25 year deal gives a higher rate and less flexibility.

Only a few lenders are offering 25-year deals as yet, such as Cheshire Building Society, Manchester Building Society and Kent Reliance, and these are due to be joined by the Nationwide on Tuesday 17 July. Their rate will be 6.39% for new borrowers and 6.49% for anyone who would like to remortgage. Kent Reliance offer a good rate, fixed at 5.98% for 25 years, but the catch is that their redemption penalty is 3% at any time during the 25 years. Manchester BS’s 3% penalty is only applicable for redemption in the first ten years. Their product is actually available for any period of 15 to 30 years. Cheshire BS offer interesting penalty free windows every two years for the first five years, when borrowers can redeem without penalty. The window lasts for three months and you must redeem within that period or be subject to the penalty which is 5% in the first four years, then dropping by 1% every four years. After 20 years there is no charge.

Skipton Building Society are currently offering a five-year fixed at 5.79%, or Cheshire have a 5.69% fixed for ten years which look like better options. Most analysts believe that ten years is too long to fix, with the associated exit penalties, and, as we have seen, those penalties can be painful in that period.

Of course the idea behind fixing for so long is to achieve stability in that monthly repayments will always remain the same. In fact, they might represent a big gamble for anyone taking one out now. These were not flavour of the month with lenders when base interest rates were down below 4%. They are now coming to the fore when the base rate is 5.75%. It’s hard not to have a sneaky feeling that providers are confident that they will make plenty of money out of them – either because the rate they are set at will always be higher than the underlying base rate, or because if you redeem the loan early then they’ll receive a very nice penalty amount in their favour. Let’s face it – if a bookie wins, you lose. So, if the mortgage provider thinks he’ll win, it must mean you have a chance of losing. Is it much better than a potentially expensive gamble?

If you want a 25-year deal, the best bet therefore is to find one without expensive redemption penalties, and penalties that are negated after ten years at most. Then you will have security of steady payments for ten years after which you attain a degree of flexibility. You also want one that is portable – i.e. movable if you move house, so that you’re not tied down to the same house for 25 years – a situation which is very rare these days.

One benefit that long-term fixers do gain is the avoidance of the fees that other borrowers pay if they remortgage regularly. Experts calculate that the average homeowner will pay almost £10,000 in arrangement fees over a 25-year period if they remortgage every two years.

There are some attractive short-term fixed deals around. Cheshire has a two-year fixed rate of 5.35% and Northern Rock as a 5.59% fixed for two years. The problem is the associated arrangement fee in each case. Cheshire’s is £1,499 and Northern Rock have a crippling fee of £1,995. Such deals tend to be better for those with large loans as the fee then represents a smaller percentage of the overall outlay. Interestingly, Northern Rock have set a maximum loan of £300,000.