Downsides to long-term mortgage fixes

Potential issues include the lack of flexibility should a client's situation change and they need to move or downsize, the risk rates might go even lower, locking them in at a higher rate than would be offered elsewhere, and the early repayment charge (ERC).

"Situations change", says Adrian Anderson, director of broker Anderson Harris, "and trying to envisage what is going to happen to you over the next 10 years is hard."

John Eastgate, sales and marketing director for OneSavings Bank, agrees. "Committing to a long-term fixed-rate deal can be an issue if your circumstances were to change. 

"For example, if you took out a 10-year fixed rate, a lot can happen in that time. You could move jobs, have a family or separate from your partner."

Flexibility

According to Mr Eastgate, clients should be well advised of the potential lack of flexibility with long-term fixed rate mortgages. While some people might not intend to move - perhaps their children are in a good school in the area and there is plenty of room - and therefore a seven or a 10-year fix would be sensible, life rarely follows a linear path.

While long-term fixes could be a great option for both certainty and security, they are not always flexible. Jeremy Duncombe

He says: "If you need to move home or borrow more money during the fixed term, you may find your options reduced. 

"There is no guarantee your lender will agree another mortgage with you as either your circumstances or their criteria may have changed. Even if they can lend, their products may not be the most competitive in the market." 

And "borrowers often don't like the thought of tying themselves into a product for too long without having to pay a penalty", says Paul Darwin, director of intermediary relationships for Skipton Building Society.

For Andrew Montlake, director of London-based Coreco, this lack of flexibility with long-term fixes is nothing new. He explains: "The downsides are the same as they have always been, and relate to the tie-ins applicable to such products.

"It is all about getting the right advice and, for those people who need more flexibility or maybe want to sell or move in the next two to three years, then a longer-term fix may not be the best advice."

Jeremy Duncombe, currently director of the Legal & General Mortgage Club, comments: "While long-term fixes could be a great option for both certainty and security, they are not always flexible.

"Borrowers whose circumstances have changed or are likely to change, perhaps the result of a divorce or a need to relocate because of work, might find these types of mortgages can be particularly restrictive and can carry heavy ERCs".

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. 

In recent months, 10-year fixes have been priced very cheaply so the risk of a cheaper deal coming along in a couple of years has been less of an issue. Adrian Anderson

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."

While it might make financial sense to help clients remortgage onto a much lower long-term rate and take the short-term hit on the ERC, this might not be the end of the costs involved to a client. 

Depending on the terms and conditions, the mortgage provider might also ask for any rewards or incentives paid to you to be returned, such as discounts on legal fees or cashback.

Portability

That said, many fixed-rate mortgages can be moved with the borrower so an ERC and lack of flexibility might not always be a problem for every borrower. As Mr Darwin adds, some products allow an overpayment facility per annum without penalty.

It all depends on the terms and conditions of the mortgage.

A spokesperson for Halifax comments: "Many fixed-rate deals have ERCs for closing early or repaying before the end of a term, but lenders may allow borrowers to take their existing deal to a new property, so the terms of a product should always be checked carefully."

Jaedon Green, director of product and distribution for Leeds Building Society, explains: "Any future requirements to downsize should be reflected in the advice provided.

"Most fixed-rate mortgages are portable, subject to the usual affordability and underwriting assessment, so if the borrower moves, they can take their fixed-rate deal with them."

Cheaper deals

Shorter-term fixes are generally - or at least have been until recently - much cheaper than a longer-term fix. Mr Darwin states: "At the end of the day, shorter term deals are usually cheaper, and that drives demand."

There is always the possibility that rates could move downward again - back to 0.25 per cent, 0 per cent or even lower - and mortgage lenders could introduce lower deals into the market.

"Interest rates may drop after a borrower has locked into a long-term fix," admits a spokesperson for Yorkshire Building Society. "While it is impossible to predict how rates will move, borrowers should plan ahead as much as possible to ensure they can comfortably make the monthly repayments."

Should rates fall further, this would mean clients locked into a 10-year rate could end up looking enviously at the better deals on the market without being able to remortgage unless, as mentioned previously, they are prepared to - and can afford to - pay a high ERC.

While this is a possibility, Mr Anderson believes this particular scenario is unlikely. He comments: "In recent months, 10-year fixes have been priced very cheaply so the risk of a cheaper deal coming along in a couple of years has been less of an issue.

"However, ERCs remain a concern for borrowers."

Mr Montlake agrees the likelihood of much lower mortgage deals flooding the market over the next 12 months or so is low.

He says: "It could be the case that better products come along, but in the current market environment this is unlikely to be dramatically lower and it is always tricky to play the market."

However, Mr Montlake adds: "I would always advise that borrowers do what is best for them at the current time, given their plans now and in the near future, rather than worrying that a slightly better rate may come up in the future.

"It could just as easily move the other way, especially as things stand currently."

simoney.kyriakou@ft.com