Mortgages  

Downsides to long-term mortgage fixes

This article is part of
Guide to recommending long-term fixed rates

Mr Duncombe also makes the point that, in a volatile market, longer-term fixed rates could also limit flexibility should rates go down. "That's why it is so important to take advice from a mortgage broker before deciding the best route."

The ERC

An early repayment charge (ERC) or 'redemption fee' is most likely to be included as a term of a mortgage contract where the customer has a product that includes a fixed, capped or discounted interest rate.

According to the Money Advice Service, ERC charges typically range from 1 per cent to 5 per cent of the value of the early repayment. For example, a £100,000 mortgage with a 3 per cent charge would cost the borrower £3,000 if they wished to leave before the end of the mortgage term.

This covers lender costs if the borrower repays all or part of the mortgage earlier than the agreed term or deal period.

The ERC has been a prohibitive factor for many borrowers who seek to end their existing mortgage and take out another.

While some lenders may agree to a couple of months' grace period if the borrower seeks to remortgage with the same provider onto a lower rate, ERCs do act as a barrier to mortgage-rate-hopping. 

This is not so much of an issue for short-term deals such as a two-year fix, but if there are still a couple of years left to go on a 10-year mortgage, there has to be an exceptionally good reason for taking a high ERC hit. 

As Mr Eastgate says: "If your future is uncertain, then committing to a long-term deal may not be the right solution for you."

It is worth pointing out that both brokers and lenders must be clear about their ERCs in the terms and conditions, as the Financial Ombudsman Service does have strict ideas about how the ERC should be disclosed at the outset to consumers, and whether it has been fairly imposed.

In cases where a client disputes an ERC, and the Ombudsman decides an ERC should not have been applied, it may tell the lender to: 

  • Refund the charge (with interest from the date of payment to the date of settlement).
  • Pay compensation to reflect any additional cost to the consumer of paying the charge (for example, if the charge was paid via a new mortgage or paid out of savings).

On its website, the Financial Ombudsman Service (Fos) discusses such measures. The guidance states: "We may also say the lender should pay compensation for any significant distress or inconvenience the consumer might have suffered.

"We assess these payments individually, based on the circumstances of each case. We sometimes see cases where the consumer is unable to pay the early repayment charge - meaning they are tied into the agreement. We assess these cases on their own individual facts and circumstances, to come to a fair and reasonable outcome."