Gordon Won’t Like That!

Despite the Government telling us that long term fixed rate mortgages were the best thing for us, lenders seem to have sided with brokers, as they’ve gradually withdrawn the few long term deals available. With Manchester Building Society withdrawing their 30 year fixed rate last week, the longest fixed rate available now is 15 years from Britannia Building Society, but even this is unlikely to be popular. The London & Country view has always been that borrowers would probably like the long term peace of mind that these deals bring, but their lack of flexibility and long term penalties for early repayment mean they will remain unpopular.  Their unpopularity starts with the rate which is usually higher than comparable deals over shorter fixed terms. This alone is enough to discourage most borrowers, but once you consider the potential difficulties should you wish to move home then they’re dead in the water. Most lenders offer portable fixed rates. This means that if you want to move home within the fixed rate period then you can move the fixed rate with you and avoid paying any early repayment penalty. This is good, but only where you want the same size mortgage, which isn’t that common. If you want a smaller mortgage (wouldn’t that be nice), you may have to pay a penalty for partial repayment, but it’s where the borrower needs more that the real difficulties arise. Firstly you have to hope that your existing lender is willing to lend you the extra you want to borrow, and if they will, at what rate? Ok it would be naïve to expect them to have the very best rate on the market, but what if they were 2% higher than the best deal? Would you pay the higher rate or pay the penalty on the existing loan? It’s going to cost you whatever you choose. Even if they are willing to lend you the extra you need at a competitive rate, you then have to consider the penalty period on both fixed rates. Let’s assume you took a £150,000 mortgage on a 10 year fixed rate, and two years in you decided to move house. Your lender agrees to lend you the extra £65,000 you want and their rates are competitive, but they only now have a 3 year fixed rate. All will be rosy for the next 3 years but if they have nothing to offer you after the 3 years, you will be stuck with the £65,000 at their standard variable rate, whatever that may be, or face paying the penalty on the remains of the 10 year deal.

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