Rising Interest Rates: Will a 15-Year Mortgage Protect Homeowners?
The ups and downs of the pandemic have left many searching for certainty – and new figures show that desire extends to their mortgages as well.
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 wouldn’t change for seven, 10, or even 15 years.
They said they would be prepared to pay up to Â£ 1,200 for the lien, according to research from lender Kensington Mortgages.
Mortgages are usually underwritten for two or five years – but it is possible to fix for much longer
Typically, people take out mortgages with fixed rates of two or five years. After that, they can remortgage on another fixed deal with the same lender or another.
If they don’t, their lender charges them at their higher âstandard variable rateâ for the remainder of the term – usually around 25 years. This rate can move up or down.
But locking up longer has become more popular. Mortgage loans with a five-year long-term correction now account for half of new mortgages – although the vast majority of these are five-year corrections, according to a Bank of England study in 2020 rather than longer chords.
“This is in part due to changes in accessibility and the ability to borrow more over a fixed five-year period due to stress testing, but the average costs between the two have gone down, making the five-year longer. affordable “, explains Nick Mendes, technical manager of mortgages 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 deals on the market, and there’s even a product, Habito One, which allows borrowers to fix up to 40 years, but at a high interest rate.
|Lender||Fixed length||To pay||Rate||Costs||Annual cost for
Â£ 200,000 at home *
|Barclays||7 years||40%||1.39%||Â£ 999||Â£ 5,828|
|Yorkshire BS||7 years||35%||1.70%||Â£ 495||Â£ 5,966|
|Skipton BS||7 years||25%||1.99%||Â£ 0||Â£ 6,096|
|Barclays||10 years||40%||2.07%||Â£ 0||Â£ 6,153|
|Virgin money||10 years||35%||1.95%||Â£ 883||Â£ 6,157|
|Virgin money||15 years old||35%||2.55%||Â£ 883||Â£ 6,555|
|* Based on a 25-year term|
These products have not always been popular. However, mortgage rates have hit all-time lows in recent months, which could make the idea of ââfixing a rate for the next decade attractive.
This may sound particularly appealing given that there are rumors of a base rate hike from the Bank of England – which would cause mortgage rates to rise – possibly as early as December.
âAs we enter an era of rising rates, borrowers will ask themselves the question ‘Should I fix it any longer,’ adds Mendes. ‘The instinct to protect the biggest and most expensive expense in the budget a household – its mortgage – is only natural. â
When This is Money asked mortgage brokers if they recommend more than five-year fixes to their clients, opinions were divided.
Robert Payne, director of Langley House Mortgages, says he can see the benefits.
âLong-term fixes are probably the most undervalued and under-sold product on the market right now,â he says.
âMany homeowners are unaware of the benefits these products can offer, especially when rates are at their lowest. They are definitely worth considering if you have a [big deposit] and plan to stay in your property for the long term.
Locked in: Those with large deposits might benefit from a longer solution if the Bank of England’s base rate increases – but only if they’re sure they don’t want to return home
One of the attractions of a longer solution is that they can usually borrow more because knowing the mortgage payment amount over many years makes it easier to pass the lender’s stress tests.
Having a ten-year contract also gives homeowners more security if their income should change in the short term – for example if they lose their jobs or become self-employed.
“Lenders assess affordability against criteria at the time of application, so if you are looking to change professions or employment status, tying yourself to a longer term deal could give you the stability you need. adapt to those plans, âMendes said – though he stresses that they need to make sure their mortgage payments remain affordable.
They’ll also save on fees, as a longer fixation means they won’t need to keep paying arrangement, appraisal, and attorneys fees on a remortgage every two or five years. Arrangement fees are now up to Â£ 1,500 in some cases.
But repairing for more than five years is not 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 deposit of at least 25 percent.
For example, the cheapest two-year solution for someone with a 60% deposit is 0.86%, while the cheapest longest solution is a seven-year offer at 1.39%, or a difference of just over 0.5 basis point.
But for those with smaller deposits, that doesn’t make as much sense. The cheapest two-year solution for someone with a 10% deposit is 1.74%, but the cheapest rate on a ten-year solution is 3.89%, a point difference of base 2.25.
It is impossible to predict exactly by how much interest rates will rise and when, therefore, there is always an element of the unknown to adopting a longer solution.
While they’re unlikely to drop below their current levels, the slightly higher cost of a longer patch could be offset if the prices for the two- or five-year patches didn’t increase significantly.
Aside from the cost, the most important thing that a homeowner considering a longer repair should ask themselves is what their life might be like at the end of that period.
What if you ended up living next door to Hell’s Neighbors? The trap of a 10 year fix is ââthat you get stuck with this deal if your situation changes
Rhys Schofield, Peak Mortgages and Protection
Most brokers don’t recommend a long-term solution for those who think they might have to move, for example, because the mortgage can rarely be “moved” to another home.
Lewis Shaw, founder and mortgage expert at Shaw Financial Services, explains that the situations where it may work are for a family with kids in school who know they don’t want to move until they finish school – or for an older couple who only had seven, 10 or 15 years of mortgage left.
But he says he sees many customers struggling to meet even a five-year fix after a few years.
âWe see so many people signing up for five-year contracts and then wanting to move among them,â Shaw says.
And even a homeowner doesn’t think they’ll move out when they take out the loan, they warn that a lot can happen in a decade.
âThe reality is that a very long-term solution may be a good idea if you are sure you won’t be moving long-term, but who can honestly say they know exactly what they’ll be doing in 10 years? ‘asks Rhys Schofield, Managing Director of Peak Mortgages and Protection.
“What if, for example, you ended up living next door to the neighbors in hell?” Because the trap of a 10 year solution is that you get stuck with this deal if your circumstances change.
“Quite often there are huge early redemption fees to get out of a deal sooner, and no guarantee that the mortgage can be transferred to alternative property.”
Leaving a fixed rate mortgage earlier can lead to huge costs, often 5% of the loan value.
Exiting the mortgage early can lead to huge costs – often up to 5% of the total amount borrowed – although some transactions have a sliding scale that shortens the length of the mortgage term, often ending with just 1%. of the loan. amount.
There are also 10-year fixes that have the same prepayment charge as five-year – as Joshua Gerstler, Certified Financial Planner and owner of The Orchard Practice, points out.
“The TSB currently offers a 10-year fixed rate mortgage at 2.19%, but the good thing is they won’t charge you a prepayment fee if you want to leave after the fifth year.” , he said. âYou get the certainty of a 10-year fixed rate with the flexibility of a five-year rate. ”
Borrowers will also want to check what restrictions are on overpaying their mortgage. Many agreements allow this for up to 10 percent of the balance in a given year.
With a longer solution, it would take you longer to pay off your mortgage through overpayments – because those with shorter agreements might come to the end of their solution and then switch to a standard variable rate where they could refund without penalty.
Anyone considering a longer solution will ultimately have to figure out where the base rate is going and calculate what that would mean for their monthly payments in a variety of different scenarios.
Consulting a broker across the market can help, but as last year has shown, anything can happen.
In the absence of a crystal ball, it will ultimately be up to borrowers to decide whether they are comfortable committing to a mortgage for a decade or even more.
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