Uncertainty Over 25 Year Fixed-Term Mortgages

Homeowners should benefit from longer fixed-term mortgage deals revealed the Treasury recently.

The government believes that this will help those on lower incomes to buy their own homes.

At present, mform.co.uk revealed that only six companies give fixed deals lasting 25 years: Nationwide, Scarborough, Norwich and Peterborough, Kent Reliance, Co-operative Bank and Cheshire and Manchester building societies. Northern Rock offers a 15 year fixed term deal.

Frances Ghiloni, marketing and business development director of mform.co.uk, warned homeowners to be careful about a 25 year fixed deal.

He added: “The risks are clear. Not only could borrowers end up locked at a higher rate when interest rates are falling but could find themselves having to pay redemption penalties if they want to move house. It’s virtually certain people’s circumstances will change several times over a 25 year period”.

Fixed rate deals usually offer a set interest rate for a specified amount of time. This can vary from two years to 25 years with interest rates becoming a ‘standard variable rate’ after the term.

The standard variable rate is linked to the rates of the mortgage lenders which fluctuate according to the Bank of England’s interest changes.

Fixed rates are believed to be an advantage to borrowers because they are guaranteed to know exactly what their mortgage will be for a set amount of time.

However, they do draw criticism as some insist on the borrower paying an early repayment fee if they move their mortgage. Furthermore if an interest rate remains fixed for a specified amount of time the homeowner loses out if the interest rates fall.

The Council of Mortgage Lenders (CML) raised concerns about the government’s plans. They suggested that the popularity of fixed term deals might depend on the ease with which borrowers can leave them.

A CML spokesperson said: “We conclude unless there is a major policy intervention from the government then take up is going to be low. They won’t become popular unless they are priced appropriately. I think it is cost prohibitive, in a way.”

Competition between mortgage providers may help to lower costs. Moneyfacts.co.uk report that fixed-rate deals are becoming more affordable.

Julia Harris, mortgage expert for Moneyfacts.co.uk, said: “Not only are initial rates and fees on ten-year deals cheaper than two-year rates, but the deals may also work out less expensive in the long run. Imagine after every couple of years having to pay another round of set-up fees. The average at the moment is £1000 and rising and that’s without factoring exit fees into the equation.”

Ms Harris also highlighted the flexibility of some 25 year fixed term deals.

“The majority come with a ten-year tie-in. In other words if you want to come out of it after a decade you can. Then again, if in ten years time rates are higher and you want to stay on the same rate, you also have the option of doing so.”

Despite some constraints the CML also report advantages of long-term deals such as the protection from a rise in interest rates which may take the borrower beyond the means of their budget.

Linsey is an author of several articles pertaining to Mortgages. She is known for her expertise on the subject and on other Business and Finance related articles.