Donít discount mortgages for the long run

When the average period of time that someone keeps a mortgage for is just five years, the thought of taking out a 25 year product might seem like a daunting prospect.

But that’s exactly what the Government would like us to do – sign up to a 25 year mortgage rather than continuously switch between home loans every few years.

With as many as 2.8m borrowers coming to the end of their mortgage deal this year, the Government is keen to bring a degree of stability to the housing market.

Certainly, if you want to protect yourself against the threat of rising interest rates, then a fixed rate mortgage will give you the piece of mind that your repayments will remain the same – and by fixing for 25 years you can enjoy this luxury for more than most.

However, only a small selection of lenders offer 25 year deals and you need to be aware of the possible strings attached, such as early repayment charges which apply for the lifetime of the loan.

When early repayment charges can be as much as 3pc in some cases, it means borrowers end up paying a heavy price to switch to another deal if interest rates go down.

The inevitable downside of long-term mortgages is being tied into the same mortgage deal for such a long period of time.

But one solution is to opt for a 25 year fixed rate deal which has an option to switch after 10 years with no penalties. One such deal is available through Nationwide.

The mortgage offers a rate from 5.98 per cent for 25 years and allows borrowers to get out of the mortgage after 10 years without incurring any early repayment charges.

Another concern for borrowers considering a long-term fixed rate is a change in their personal circumstances. For example, a homeowner may need to switch their mortgage mid-term due to lifestyle changes such as a marriage breakdown, long-term unemployment or being unable to work due to illness.

It is well worth checking out the small print on your mortgage because it may be to your advantage. For example, the deal from Nationwide is fully portable, allowing allows borrowers to take the deal with them when they move house and if, due to lifestyle changes partners no longer wish to share a mortgage, the loan can be changed into just one name.

Another advantage of long-term fixed rate deals is that they avoid the costs associated with regular remortgaging. Lenders now require an average £1,000 to arrange a mortgage and so the danger of taking out regular short-term products is that you will soon see the costs mount up.

By sticking with one mortgage product for the lifetime of their mortgage, borrowers can save thousands of pounds on fees compared to taking several shorter-term deals.
However, a lot can happen over a quarter of a century and while it is good to have the option of a 25 year mortgage, they may not be suitable for everyone.

By Myra Butterworth

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