Pros and cons of long-term fixed rate mortgages

There are usually a few seven-year fixed rate mortgages available, but in practice Ray Boulger, senior technical manager of John Charcol, says most long-term fixed rate mortgages will be for 10 years or more.

The main benefit of a long-term fixed rate mortgage is that you are buying interest rate security for a long period.

As for many people their mortgage payment is the largest regular monthly payment, Mr Boulger says being able to budget for this over the long term is helpful.

Also, as most people’s income will increase over the period of a long-term fixed rate - even if not every year and even if below inflation - Mr Boulger says it means that the mortgage payment will progressively become a smaller proportion of income.

The obvious downside to fixing your rate for a longer period of time is that if interest rates fall the mortgage rate may look expensive. In the early years Mr Boulger says early repayment charges can be as high as 7 per cent.

In addition, most of these deals have early repayment charges for the whole term of the fixed rate which can be high compared to shorter fixes, meaning it can also be uneconomical to remortgage if rates do head south.

He adds, however, that with interest rates at record lows and the only likely direction of change in the near future being up, the risks associated with losing out on declining rates are currently small.

In August Mark Carney, the new governor of the Bank of England, issued ‘forward guidance’ that the base rate would remain at the historical low level of 0.5 per cent until unemployment drops below 7 per cent, subject to significant inflation shifts or any unforseen stability threat arising.

With the base interest rate likely to rise in the near future fixing over the longer term could currently be seen as attractive depending on the mortgage rate.

And Long-term fixed rates are very attractive currently, according to Phil Cliff, director of mortgages for Santander for Intermediaries.

David Hollingworth, associate director of London & Country Mortgages, agrees, saying that some rates are currently below 4 per cent. With this in mind, he argues locking in for the long-term carries a lot of logic to it at the moment.

He says: “You have to pay a little bit more now but you have complete stability for the next 10 years. With some of the rates below 4 per cent you have to question how are people going to feel ripped off in 10 years time?”

Aside from concerns over relative pricing, another down side is that although long-term fixed rate mortgages are normally portable when a borrower moves home, most lenders only allow porting if the borrower can meet its criteria at the time the move is taking place.

This can cause problems if lenders tighten criteria - as many have done in recent years - or if the borrower’s status has changed between completing on the original mortgage and wanting to move.

However, according to Mr Hollingworth the reason why there is unlikely to be greater uptake of this product is the simple fact of having to lock-in at all.

He says: “While borrowers are prepared to lock-in for the medium term and can forsee what their mortgage requirement might be in that time, 10 years is a long-time for many.

“They will be put off by the lock-in. You can take the deal to a new property, most will be portable, but even then you have to be aware of the limitations at that point.

“If you need to increase your borrowing, because you are upsizing, you do not know what will be on offer from your provider at that point.”