Moneyfacts.co.uk Comments on the Long Term Fixed Rate Mortgage Market

By: MoneyFacts

Lisa Taylor, Analyst at Moneyfacts.co.uk – the money search engine comments:“This week Alistair Darling, the new chancellor of the exchequer announced that Labour would shortly be issuing proposals to increase the supply of long term fixed rate loans, in a bid to tackle the affordability crisis and concerns that the short term market thrives on collecting regular arrangement fee income.

“This seems to be a rather sweeping solution to solve the massive affordability crisis. Long term fixed deals, those over 5 years have been found in the mortgage market for over 2 years, but still they remain only a very small fraction of the fixed deals available. Today only 141 products are offered with a fixed rate of 10 years or more, with most of these being limited 10-year terms. This area of the market is still in its infancy and showing signs of growth, but is still only a represents a 6% slice of the fixed rate products available. The table above shows a selection of the longer-term deals currently available.

“Signing up to a long term fixed rate deal does offer peace of mind that your repayments will not increase over your given deal period. But it is also in effect a long-term gamble on rates. While you may feel smug as rates rise, if they drop you may be kicking yourself, especially if this persists over a long period of time. We must remember that historically interest rates are still quite low, but a lot can happen in 25 or 30 years, with changing government policies, economic cycles and potentially closer alliance to the European markets.

“The long term fixed rate deals are not uncompetitive, while slightly higher than the best buy deals for 2 and 3 years, they still offer a decent rate and in the cases above charge a reasonable fee. But the real beauty and potential cost saving with these deals, comes by way of fees. Assuming today’s average arrangement fee of £800, switching providers every couple of years could add on an extra £9600 to your mortgage in fees alone. You will also avoid having to pay exit fees, valuation and legal costs and it takes out the hassle factor of continually switching lenders.

“Aside from the rate gamble, the other major disadvantage of signing up for a long term deal, is that they don’t easily cope with lifestyle changes. If you need to unlock from the deal, or house for any reason then you must remember there will often be some hefty redemption charges to pay. Lenders such as Cheshire, do offer some degree of flexibility allowing several windows throughout the mortgage, whereby borrowers can overpay without penalty.

“In principle, longer term deals could help the market, but unfortunately its not as simple as just increasing supply. To make an impact you also need demand, this will involve changing the consumer mindset to the way we borrow and confidence in long term performance of the economy and housing market.

“Additionally, as lenders do perhaps rely on fees income to offset some of the low rates they offer, they may be reluctant to forsake this. So being forced to offer long-term mortgages will only see them offering the products at prices above the market equilibrium.

“But, if they are successful and the UK’s mortgage market moves towards longer term deals, what impact will this have on competition, the number of lenders and innovation. Today’s mortgage market survives on churn and competition. A change like this could completely reshape the mortgage market from how we know it today.”

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