Long term fixed rate mortgages cost homeowners


Cautious homeowners who opted to set their mortgage up on a long term fixed rate are losing significant amounts of money each year as interest rates continue at all time lows.

Just three years ago a long term fixed rate was still a popular choice amongst home buyers. These mortgage products gave peace of mind as they payments were fixed for a prolonged period, typically five or 10 years, often even longer.

Former Prime Minister Gordon Brown championed longer-term fixed rate mortgages when he was Chancellor, believing that they reduced volatility in the housing market and offered help to lenders for the development of such products.

In response to his calls for 10, 15 and even 25-year fixed rate mortgages; many lenders launched new products that advertised both value and security. The Nationwide offered a 25-year home loan charging 6.39pc for those with a 10% deposit, while Cheshire Building Society launched a 10-year fixed rate at 5.99%.

However, as interest rates have fallen in response to the recession the availability and popularity of these types of mortgage has dwindled. In May 2008 there were 125 mortgages available with fixed terms of longer than 10 years, now there are only three (Source: Defaqto).

The past few years have seen lower mortgage payments for those people with tracker or variable rate mortgages; payments have not fallen for those people on longer term fixed rates making them worse off than if they had opted for a variable rate mortgage or indeed a short term fixed rate which would have come to an end by now.

Borrowers stuck on a long term fixed rate have a number of choices. They could sit tight and wait for interest rates to rise, which most experts believe will happen over the next year to 18 months. However rates would have to rise considerably to make some of the long term fixed rates look competitive, which may lead some on these deals to consider a remortgage.

Borrowers could look to change their mortgage product either with their existing lender or by remortgaging to a new bank or building society.

However long term fixed rate products generally came with early redemption penalties. These penalties were either as a percentage of the loan, typically 3% – 5% or a number of months interest. Such penalties can amount to thousands of pounds and must be factored in to borrower’s calculations as the lower monthly payments, which could make a change attractive may, be eaten up by these penalties.

It may also be harder to obtain a remortgage as lending criteria has tightened over the past few years and house prices have fallen meaning the levels of equity in people’s property has dwindled.