Is Now The Time To Lock Into A Long-Term Fixed-Rate Mortgage?
There’s no one-size-fits-all answer to the question posed above. No matter the rates on offer, no matter how stable or unstable the economy may be, there will always be some people who find their needs best met by a long-term fixed-rate mortgage, while others find that their circumstances demand the flexibility offered by a shorter-term loan. Throughout this article, we will discuss the factors that determine these differences in preference. We hope that by cataloguing the various pros and cons of these two broad mortgage options, we will provide our readers with a better sense as to which type of product best suits their needs.
Short-term fixed-rate mortgages almost always come with lower rates than do their longer-term counterparts. Mortgage holders who are happy to endure a certain amount of uncertainty are able to take advantage of these lower rates, while those with an aversion to risk will be forced to pay a premium in order to insulate themselves from potential future fluctuations in the market. Much of what determines the suitability of a long-term mortgage, therefore, is determined by temperamental factors: whereabouts do borrowers fall on the spectrum of risk preference? Are they risk lovers or risk haters? If you are the kind of person who likes to know that their mortgage rate will not fluctuate for the foreseeable future, you may find yourself leaning towards a product with a longer fixed-term.
In addition to one’s risk- profile, some of our clients are more averse to hassle than others and so elect to take out long-term mortgage products for no other reason than to postpone the date at which they next have to worry about their mortgage. Even with a mortgage broker project-managing the entire process, many borrowers regard the rigmarole surrounding the acquisition of a mortgage as highly tedious. They are therefore willing to do everything they possibly can to reduce the frequency with which they are forced to undergo the ordeal of remortgaging. In such cases, it may make sense for our clients to pay the premium that accompanies a long-term fixed-rate simply to avoid the bother related to remortgaging.
Another factor that often contributes to the perceived attractiveness of short- relative to long-term fixed-rate mortgage products is the size of the gap between short- and long-term mortgage rates: the smaller this gap, the more attractive long-term fixed-rate mortgages become, because the size of the premium being paid for the added security they provide shrinks. As this gap shrinks, a growing number of people will find themselves leaning towards longer-term mortgages, feeling justified in paying a slightly higher rate of interest in exchange for the added security conferred by such products. As it goes, Moneyfacts released data showing that, as of June 2019, this gap is smaller than it has been at any point in the last seven years. It now sits at 0.36%. Unsurprisingly, data recently released by the Financial Adviser Confidence Tracking Index found that 49% of all mortgage customers now opt for a long-term (i.e. five-years or more) fixed-term mortgage; this compares with just 25% in 2013, when the gap between average two- and five-year fixed-rates was significantly larger than it is now.
There’s another central factor currently affecting the attractiveness of long-term mortgages: Brexit. Nobody, not even the most prescient of pundits, is able to venture a confident prediction as to the end date or result of this political ruckus. Even the Bank of England, whose role it is to cast an guiding light out into future, has been unable to go more than two months without flip-flopping on its prediction for the future. One minute we’re being told that multiple rate hikes are imminent, the next we’re told that the base rate is unlikely to move any time soon. How, then, can the average man on the street be expected to out manoeuvre the market? Answer: he can’t. And so he is choosing to hedge his bets, to lock into a competitive long-term fixed-rate mortgage, and watch Brexit unfold from the safety of his ten-year fixed.
These two factors – the difference between short- and long-term fixed mortgage rates, and the lack of certainty about our political future – have resulted in an explosion of demand for long-term mortgages. But to end the discussion here would be to paint an incomplete picture. While long-term fixed-rate mortgages come with an array of pros, they also bring with them a number of cons: firstly and most obviously, they are almost always more expensive than shorter term products. But in addition to this, they are also almost always significantly more constricting: what they provide in stability they take away in flexibility.
Many ten-year fixed-rate mortgages come with hefty early repayment charges (ERCs). These ERCs mean that mortgage-holders cannot get out of their existing mortgages without incurring thousands of pounds worth of additional cost. Most lenders have a maximum overpayment limit of 10%; this often means that borrowers are only able to make a maximum overpayment of 10% of their mortgage balance each year without incurring their lender’s ERCs. Many of our clients – particularly those earning annual bonuses – express a preference for mortgage products that allow them to make annual overpayments in excess of 20 or even 30%. Others come to the mortgage process with the expectation of an imminent liquidity event – be it moving house, selling a business, etc. In both cases, if they were to lock into a long-term fixed rate product, our clients would find themselves forced to pay substantial ERCs in order to fulfil their needs.
Everybody’s different. While the factors that determine the attractiveness of short- relative to long-term fixed-rate mortgages are currently poised in favour of longer-term options, plenty of reasons exist that make short-term mortgages a more suitable product-type for certain types of individual with certain types of requirement. The best way to be absolutely sure that you have accounted for all of the operative factors when deciding on the length of your mortgage’s fixed term is to speak to a qualified mortgage consultant. They will take the time to understand your unique circumstances, and will use their up-to-the-minute, expert understanding of the mortgage market to provide you with an informed recommendation of the type of product that is best suited to you.
If you would like to discuss your mortgage-options with a qualified professional, you can speak to one of our mortgage advisors on an obligation-free basis by calling us on +44 (0)20 7317 2820 or alternatively by emailing us at