A question I’m asked frequently during the course of my day is ‘How long should I fix my rate for?’
The current trend amongst my clients in the City is to request a fix for five to ten years and I can understand the attraction in this. Rates are at a historic low, we live in uncertain economic times and whilst no one would try and second-guess when a Bank of England rate rise is coming, we all know it has to happen at some point. Mark Carney recently commented that a base rise is "likely to become necessary" but that now is "not yet the time".
With a five-year fixed rate as low as 1.70% at 60% loan to value, I do understand why clients find a long term fix attractive. However, whilst no one will ever get buyer’s remorse at that rate, there are other factors that you need to consider if you are planning on fixing in for a longer period.
If you enter into a five-year contract then the lender expects you to see out that fixed rate period. If you decide to move within the UK during that period you can take the mortgage with you to a new property in a process known as ‘porting’. Porting in theory is pretty simple, but it does have its complications.
Let’s say you decide to move home two and half years into a five-year deal.
You take forward to the new property the current balance on your mortgage on the rate you signed up to. Assuming you then need to borrow some more money to complete the transaction, the obvious option is to go back to your current lender and ask to borrow the extra money you need.
High street mortgage lenders all require ‘first charge’ over a property i.e. they have the rights to the property in the event of a default. This means you could not have your original mortgage with Halifax and then the top up with Barclays. Some niche lenders do offer ‘second charge’ mortgages, but these are not something I recommend as a first choice.
Therefore, if you want to avoid the early repayment charge, you are forced in reality to go back to your original lender for the additional borrowing.
You can borrow the extra money at whatever the rates are when you apply for this ‘top up’ mortgage, at the relevant total loan to value. The issues here are:
- If your current lender's rates are not competitive, you have very little choice other than to accept the rate being offered.
- Your current lender might not lend you the amount you need or they may refuse to lend against the property you want to buy. If this happens you would need to trigger early repayment charges then start the process with a new lender again.
- Even if they do lend the amount you need, the top up amount will have a different product end date to the original loan amount which leaves many clients trapped with the current lender or triggering early repayment charges on part of the mortgage to get a better deal elsewhere.
Virtually every fixed rate deal in the market has an early repayment charge which is typically a percentage of the balance that you owe the lender if you break the agreement early.
The following table shows the redemption penalty based on paying back a £400k mortgage on the market leading five-year fixed rate:
|Year of repayment||Maximum charge|
As you can see even in the final year we are giving away £10k of a client’s hard-earned equity. Triggering an early repayment charge is something I really do not like to do.
The reasons for needing to pay off earlier than expected can be varied and not usually foreseen.
In my experience, the common reasons are separation, death of a partner, relocation or simply that the current lender will not lend the client the money they need for the new house.
I also urge my clients to look at the amount of capital you actually pay back on these five-year deals versus for example a two-year fixed rate. Let us again consider the £400k repayment mortgage over 25 years on 5 years fixed at 1.70% vs the two-year fixed rate market leader of 1.03%*
|Loan amount||Rate||Fixed monthly payment||Interest element of payment||Capital repayment element|
As you can see, you pay £125 a month less on the two-year fixed and you pay £223 less interest a month and £98 more capital off each month.
The real win for me here however is only being tied to a lender for two years and the chance to restructure if your situation changes. The five-year rate does give you peace of mind - but at what cost?
Don’t get me wrong, there are people that really should consider fixing in for longer terms. We now have seven and ten-year options which are relatively recent additions to the market place and in the right circumstances these products have a place, but they are not for everyone.
If you are at a higher loan to value, if you are not sure of your long-term life plan, if you are doing major building work or if you are likely to receive large lump sums during the mortgage term - I would highly recommend a conversation with a mortgage professional before you make a decision.
*Only selected brokers have access to this rate, LIFT-Mortgages being one of them.