Long Term Mortgages Should Definitely Be Considered
October 2005
Many mortgage holders are now considering, or at least seriously looking at longer term fixed deals. This article carries on nicely from the LearnMoney article published last week which highlighted the research done by Morgan Stanley's chief UK economist David Miles - Read the article here
Miles argued that borrowers should take out long-term fixers as insurance against future rate shocks. This seems especially valid at present as mortgage arrears are at 6 year highs. Just think at the likely damage that could be done if interest rates pop up a few percentage points over the coming years..........
The Nationwide Is Urging It’s Clients To Think Long Term As Well
- The Nationwide is urging its clients to also think about their mortgages in a longer term fashion
- The bank has just slashed the reservation fee on its 5 and 10 new deals from £389 to £299
- But in a typical banking sector move it is raising the valuation fee on all mortgages
- Charges on a £100,000 properly are rising by £35 to £245
Better Manage Your Finances With Long Term Mortgages
One of the reasons that UK borrowers have shied away from long-term fixed mortgage deals is because of the yo-yo interest rates of the late 1980s and 1990s. But Western governments have got their act together over the last 10 years and nobody can argue that the interest rate picture has been anything but stable.
But some are arguing that if anyone can mess up the financial status quo, it’s politicians. For this reason mortgage holders should again at least look at long-term deals especially for people who want to manage their finances more effectively, and budget for the long-term.
Long-Term Deals Can Be Competitively Priced
Banks in the past have concentrated their efforts on offering short term mortgage deals but are now realising that more than a few clients will move to long-term fixed deals if they're priced attractively.
Some current deals -
- Lambeth Building Society 4.3% for 5 years (min. 20% deposit)
- Chase de Vere 4.54% for 7 years
- Leeds Building Society 4.65% for 10 years
Portability and Penalties
- With any long term mortgage deal it’s important to make sure they’re 100% portable, ie if you move you can take the loan with you for your next property
- BUT some long term deal have nasty exit penalties
- If you therefore want to move up or increase the borrowing you might be forced to borrow from the same lender at the Standard Variable Rate unless you pay the exit penalty amount
So make sure you really do your homework with long term mortgages especially when it comes to fees, exit penalties and other related charges - See article below - Why you should always use a mortgage broker). The Coventry Building Society for example has a 5 year fixed deal at 4.858% with zero early repayment charges. It therefore might make sense to go for a slightly higher interest rate with no charges so as to remain as flexible as possible.
Never forget that flexibility with a mortgage is a great asset to have.
Summary
With a long dated fixed rate mortgage you know exactly what you’re going to pay whatever happens to the economy or interest rates. This means you can really budget for the long term. Right now interest rates are still at a generally low level so even if they drop a long term deal won’t become that more expensive.
Long term mortgages should also be considered by anyone who uses a large chunk of their monthly salary for repayments. Think about the downside of what would happen if interest rates rose considerably over the coming years. Would you be able to afford your repayments, and would the property market still be buoyant enough for you to sell at an attractive price?
Unfortunately higher interest rates could dump mega problems on a significant proportion of mortgage holders, and it’s these kind of consequences that long term mortgages are designed to avoid.
See Also
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