Mortgages Section

Long Term Fixed Mortgages Are About Protecting Your Financial Downside - Find Out Why

September 2006

In our opinion far too many people like to gamble with what’s usually their biggest monthly expense, the mortgage payment. And while this is generally ok if the amount is manageable it can cause horrific problems if interest rates start to move considerably higher.

And the worst mistake that anyone can make is thinking that interest rates, and in turn mortgage rates can’t double or even triple over a multi-year period. After all it wasn’t so long ago that many of us were paying a mortgage rate of nearly 10%.

Everything runs in cycles and what goes down eventually goes up etc.

Consider Using A Long Term Fixed Rate Mortgage

For many people fixing their monthly mortgage payments for 5 or even 10 years is a real advantage because they can zero in on their monthly budget with precision. Fixing a mortgage means that whatever interest rates do the monthly payment will always be the same.

This is great news if interest rates were to shoot up to say 7% or 8% over the next few years. Of course interest rates could always fall considerably making a fixed rate mortgage more expensive.

Downside Is ALWAYS More Important Than Upside

In our view, and for most people, it’s the downside risk (higher interest rates) that is far more critical than any upside advantage (falling interest rates).

Say for example you fix your mortgage today with a monthly payment that you can afford
If interest rates were to drop 2% or 3% would there be a likelihood that your house might get repossessed?
Of course you might not be too happy that you’re paying more per month that say a friend who has seen their mortgage payments reduced
BUT, if interest rates rise considerably forcing your mortgage payments to rise would you still be able to continue the monthly payments?
Note that in a situation like this many people would likely be in the same boat putting extreme pressure on house prices so if your mortgage is large (as a percentage of the value of the house) it’s possible that you could fall into a negative equity
Summary - It's a simple equation : When interest rates rise to do repossessions

The Leeds Building Society Offers Two Fixed Rate Deals

To get your head around some competitive deals on offer check out these two from the Leeds Building Society -

4.97% fixed for 10 years
Can borrow up to 90% of the property’s value
10% capital overpayments are allowed per year without a financial penalty but early repayment charges do occur on anything above this level
The deal has charges of £649
5.47% fixed for 10 years
No fee and no repayment charges

Summary

These are only a couple of the most recent competitive deals but there are plenty more out there so those looking to fix should make sure they shop around and in our opinion it’s always a good idea to at least consult a mortgage broker.