Donít get yourself in a big fix

The credit squeeze is panicking huge numbers of homebuyers into long-term mortgage deals.

The number of people signing up for 10-year loans has almost doubled in the past year.

It seems as if the recent mortgage drought has put the wind up many buyers. As a result they are eager to secure their funding well into the future.

Competitive two and three-year deals have become harder to come by as the total number of mortgages on the market has shrunk by 40 per cent.

But the number of 10-year loans has risen from eight per cent in July 2007 to 15 per cent today.

The number of 25-year mortgages available has also doubled from nine 12 months ago to 18.

The trend is easily explained but many buyers may live to regret locking themselves in to such lengthy loans.

As I say it’s easy to understand why people might be tempted.

Recent volatility in the mortgage market has left people anxious to know exactly where they stand.

With lenders becoming more choosy about who they give money to and demanding larger deposits it’s not surprising people would think it smart to bite the hand off banks or building societies offering what they see as peace of mind.

Another factor driving the rush to long-term deals could be the sharp rise in mortgage arrangement fees.

They have jumped around 20 per cent in the past year alone as lenders seek to fatten up their profit margins in the wake of the credit crunch.

In August last year, the average application fee was a shade under £740 but this has risen to almost £890 today.

For three-year fixes the increase is much steeper from around £590 to almost £940 or nearly 60 per cent.

Many deals carry far higher fees with £1,499 quite common.

Many buyers may think that by signing up for longer loans they will avoid having to pay these fees again in two or three years, as well as deferring the headache of searching for the best deal at that time.

But I’d advise against tying yourself up for too long as nobody knows what will happen in the future.

You may plan to stay in your home for up to 25 years but frankly it’s unlikely.

Most people move every five or six years. Sometimes it is simply to buy a bigger home and you could probably take the loan with you.

But people’s circumstances change. Redundancy, illness or marriage break-up are all common reasons that force people to move unexpectedly.

And the longer you have fixed you loan for the stiffer the financial penalties will be if you need to extricate yourself.

Early redemption charges tend to be substantially higher than on shorter fixed-rate deals.

Often the penalty is a percentage of the loan and falls each year you have the mortgage.

To escape a 10-year loan for £150,000, for example, can cost as much as 13 per cent – or a shocking £19,500.

If that isn’t enough to make you think twice, another reason to hesitate is that the faltering economy means rates are now probably more likely to come down than rise so there may be cheaper mortgage deals on the horizon.

You will feel pig sick if interest rates tumble and you have locked yourself into a deal which means you are paying over the odds.

So if you want some peace of mind without running the risk of huge redemption penalties go for a three or five-year fix.

By Clinton Manning

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