The
Government wants to encourage more borrowers to sign up to
mortgages
with interest
rates that are fixed
for between ten and 25 years.
But fixes as long as this are extremely risky.
If you're lucky, there can be advantages to this kind of deal,
but if you're unlucky, they can work out desperately expensive.
The benefits of a long
fix
• Certainty
It's far easier to budget and brings peace of mind when
you know that no matter how high other borrowers interest
charges rise, your monthly mortgage repayment won't alter
for the next ten years or more.
• No need to switch
you'll also avoid the expense and hassle of remortgaging
every few years to get a better deal.
The dangers of a long fix
• Cost
This kind of certainty comes at a price ten and 25-year
interest rates are not as competitive as those for the very
best shorter deals.
• Lack of flexibility
Many experts think rates are nearing the end of their current
cycle of rises, with cuts likely by next year.
This means anyone with a long-term fix could soon find themselves
paying far more than other borrowers.
Over the years, that could add up to thousands of pounds wasted.
• Penalties
If rates do fall, you can't just abandon your deal and switch
to a cheaper one.
These typically last for ten years or more and can be on a
sliding scale, reducing as the years pass.
Sign up for a ten-year fix and you might face
a charge of 5 per cent of your original loan amount to get
out within the first couple of years (£6,250 on a £125,000
mortgage) falling to 2 per cent (£2,500) in year ten.
With a 25-year deal you might be charged 3 per cent to escape
any time within the first decade or even the entire term.
The alternatives
that's why you might do better to copy the vast majority of
borrowers and choose a fixed
or discounted
deal of between two and five years.
They tend to be cheaper and you should be free to move on
as soon as the fix or discount ends.
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