Pros and cons of long-term fixed rates

Pros and cons of long-term fixed rates
Long-term fixed rate mortgages have been in the news again whether it’s the Prime Minister suggesting they could be a help to first time buyers or lenders launching fixed for life deals. If you’re considering locking your rate down for many years to come, make sure you weigh up the pros and cons of a deal first.

Most long-term fixed rate mortgage deals currently run for 10-15 years. For example, TSB, Barclays and Halifax are among the lenders offering 10-year fixed rate deals, whilst Virgin Money and Accord Mortgages both offer 15-year deals. There have been deals fixed for the life of the mortgage in the UK before and a number of lenders offer them now, although in many cases they will be for the Retirement Interest Only market, designed to enable older homeowners to carry on paying their monthly mortgage interest payments until they die or go into long term care.

What are the benefits?

First and foremost long term fixes provide peace of mind that your monthly mortgage payments will remain the same throughout the fixed period, regardless of what happens to interest rates. If rates climb then it will prevent your mortgage costs escalating and save money in the long run.

Signing up for a long-term fixed rate mortgage might also appeal if you want to avoid the potential costs associated with remortgaging every couple of years.

Things to consider before locking in long term

Although longer fixes have been available for some time in the UK, they haven’t proved hugely popular. That is often due to the lock-in periods that can last throughout the fixed period and can result in hefty charges if homeowners’ circumstances change and they need to pay off their mortgage early.

You’ll therefore need to think carefully about your future plans and whether your circumstances are likely to change. If you need to redeem your mortgage early for any reason, many long-term fixed rate mortgages, although not all, will impose hefty Early Repayment Charges.

Although many deals will be portable if you move house, you’ll need to meet your lender’s eligibility criteria at the time, which could prove tricky if, for example, your income has reduced or your outgoings are higher. If your new home costs more than your previous property and you need to borrow more, this is likely to be at a different rate to your existing mortgage.

Lenders also tend to charge steeper interest rates on long-term deals than on shorter term fixes, in return for the security that this type of deal provides. As a result your initial monthly costs are likely to be higher than if you’d chosen a two or five year fixed rate mortgage, although it could pay dividends if rates rise over time.

If mortgage rates fall further and you’re tied into your existing deal, you won’t be able to switch to a lower rate without potentially facing an Early Repayment Charge.

You can find out more about the benefits and drawbacks of fixed rate mortgages in our guide to fixed rate mortgages.

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