To long-term fix or not to long-term fix? That is the question
Following November’s rate rise, a number of articles ran urging people to consider long-term fixed rate mortgages, of 5, 7 or even 10 years. But while long-term fixes can be perfect for some, they can be a disaster for others.
Since the Bank of England raised interest rates in early November, there's been no shortage of passionate articles in the personal finance and property media advising people to lock into longer term fixed rate mortgages, of five, seven or even 10 years. The underlying theme across all of them is that it’s vital for homeowners to protect themselves from…{cue ominous drumbeat}... INTEREST RATE ARMAGEDDON!
Now this rush to the security of long-term fixes certainly stacks up on the surface: after all,
anyone on a variable rate at present is a sitting duck if rates start to edge up faster than expected in 2018 and beyond.
Long-term fixed rates, by contrast, offer peace of mind in a rising rate environment and the knowledge that mortgage repayments are set in stone for many years to come. And if rates have bottomed out, which they almost certainly have, why on earth wouldn’t you want to lock into the lowest fixed rate possible for as long as possible?
Personal circumstances count for a lot
Well, at Dashly, we can think of one major reason why people need to think long and hard before they take out a long-term fixed rate mortgage: it may not suit their circumstances one bit. After all, locking into even a 5-year fixed rate requires a lot of commitment. Anyone considering it needs to be comfortable that their circumstances won’t change significantly enough in the next three to four years for a tie-in period to become a hindrance.
Because if they do need to get out of that long-term fix a lot sooner than expected then the cost, make no mistake, can be punitive. With this in mind, and despite the fact that many long-term fixes are portable, longer term fixes are arguably less appropriate for first time buyers or younger homeowners whose circumstances are likely to be a lot more volatile than a couple in their fifties, say.
Another reason for perhaps not locking into a longer term fix is that while rates are likely to go up, they are unlikely to go up significantly. Mark Carney has said he more or less agrees with investors who have priced in two more rate rises in the next three years. Now Mark Carney has serious form, having cried wolf about rate rises on multiple occasions, so there’s no reason to think that anything he says matters.
Will the premium of a long-term fix really pay off?
But with the economy struggling to get into gear, households groaning under a huge amount of debt, and the uncertainty caused by Brexit going nowhere soon, it’s hard to imagine rates will rise much at all in the current climate. And if this proves to be the case, the premium many people will have paid for the protection of a long-term fixed rate could prove to be quite costly in hindsight.
I suppose the moral of this tale is that you should always think through all the potential downsides of taking out a specific mortgage before you sign on the dotted line. Long-term fixes will be just the job for some borrowers, but for others they could prove to be a massive ball and chain.