Long-term fixed-rate mortgages not as flexible as the Chancellor would have us believe
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Melanie Bien, director of Savills Private Finance, comments:
‘Like his predecessor, the Chancellor is determined that first-time buyers should take out long-term fixed rate mortgages in order to protect themselves from interest-rate fluctuations. But he is under the illusion that borrowers are interested in taking these mortgages out in the first instance and that they ‘allow [borrowers] the flexibility to move, or get a new mortgage if rates go down’.
‘The reality is that a tiny proportion of borrowers are interested in committing themselves to a fixed rate for 10 years or more. This is because they wish to retain flexibility and long-term fixes are not flexible.
‘Only if long-term fixes are competitively priced and allow borrowers to exit early on without having to pay a significant penalty will they really take off. Flexibility is arguably as important as security and while long-term fixes offer the latter, they do so at the expense of the former.
‘In his Budget speech, the Chancellor said that these deals allow homeowners to move and take on a new mortgage if interest rates come down. But while these deals are portable – as long as the lender is happy with the new property and agrees to extending the mortgage as required at a competitive rate – the point is that borrowers are locked in for at least 10 years on some deals and up to 25 years on others.
‘If the borrower opts for a 25-year fixed rate with the option to switch after 10 years with no penalties (offered by Nationwide and Norwich & Peterborough), and those 10 years lapse, they can move to another mortgage without having to pay an early repayment charge (ERC). But other lenders, such as Kent Reliance Building Society, charge an early repayment charge for the lifetime of the loan – 3 per cent in this case – which would make it extremely costly for the borrower to switch to another mortgage in the event of interest rates falling significantly.
‘Another issues is that while rates on long-term fixes have fallen, the impact of the liquidity squeeze means some lenders are charging premium rates to those with a deposit of less than 25 per cent. This will hit those first-time buyers the Chancellor is so keen to assist who have little or no deposit.
‘For example, Nationwide’s 25-year fix has a rate of 5.98 per cent for those borrowing up to 75 per cent loan-to-value (LTV), while the rate climbs to 6.58 per cent for those borrowing up to 95 per cent LTV. This would mean that someone with a 5 per cent deposit taking out a £150,000 mortgage on an interest-only basis would pay an extra £75 a month more than someone with 25 per cent to put down.’