Seeking shelter from the mortgage market blues

Good news for homebuyers looking for long term stability and security. The number of long-term fixed rate mortgages on offer has doubled, offering much wider choice as borrowers make the flight to safety in the face of rising inflation. 

According to MoneyExpert.com which monitors financial products, the percentage of mortgages fixed for 10 years or more has risen from 8% of products in July 2007 to 15% today. And its analysis shows that there are now 18 different 25-year fixed rate deals on offer from five different providers, compared with nine this time last year. 

Long term fixes look relatively attractive. MoneyExpert.com says that the average initial rate payable on a 25-year fixed rate mortgage is 6.56%, some 0.3% lower than the current market average for all mortgages of 6.9%.

‘The credit crunch has prompted a flight to safety by borrowers who have been stung by dramatic rises in the rates on short-term deals,’ commented Sean Gardner, director of MoneyExpert.com. ‘At the same time lenders are increasingly keen on signing customers up to long-term deals which offer them certainty.’ 

They are also keen on locking in customers as it is always more expensive to attract new business than to hang onto existing clients.

So should you opt for a longer term fixed rate in the face of increasing uncertainty? Given the prediction of the Crosby report, that the mortgage market is not likely to return to normality for some two years or more, it seems unlikely that fixed rates will drop below 5% in the foreseeable future. 

During the boom years of 2003 to 2007 lenders were advancing money at below Bank Base Rate in order to attract business. These were loss-leader loans and in today’s climate, lenders are unlikely to do this again.

Fixed rates can provide stability – particularly for those who are coming up to retirement or already in retirement who are not likely to want to move again. But even for those who may want to move house, virtually all mortgages are portable so you can take the existing fixed rate with you. The only drawback is that if you need to borrow more you will be restricted to whatever your existing lender offers.

Currently the best five-year fix is from Nationwide at 6.18% for loans up to 75% of the property’s value, with the best 10-year fix from Yorkshire Building Society at 5.99% for 75% loans. 

This compares with the best two and three year fixes, both from First Direct at 5.98% for a two year fix and 5.95% for a three year fix, for loans up to 80%.  Borrowers will have to decide whether it is worth paying a small premium for longer-term peace of mind.

Gardner warns borrowers to look out for penalties. ‘Early redemption charges on long term deals tend to be more substantial than shorter fixed term mortgages. In some instances you can be hit with a charge of 13% of the value of your loan - which on a £150,000 mortgage would mean paying £19,500 to get out of the deal.’ 

A penalty of 13% is, however, uncommon and the average is around 5% of the amount outstanding at the time you redeem the mortgage. Most fixes allow you to repay up to 10% of the outstanding debt each year without penalty.