Fixed rates have hit lows all borrowers must be delighted to see, and although it makes their decision between a fixed and discounted variable rate all the more difficult, it is a nice selection problem to have.
If peace of mind is the borrower’s main driver, then fixed is the way to go at the moment with capped rates being outgunned in terms of rate.
This is not the only decision-making process the borrower has to deal with however, as they must then decide on how long they wish to lock into the fix. Fixed rate periods vary from between one and 25 years.
With lenders able to fund fixed rates at such competitive rates at the moment more long-term deals (10 years and more) have found their way onto the market. With rates as low as they are, should borrowers take their chance and lock in now for the long term?
As is often the case in selecting the right product, redemption penalties are a key area borrowers need to be made aware of.
These long-term fixes are likely to carry heavy penalties during the incentive period, and if there is likelihood of a change in mortgage needs through a move or other lifestyle change then a short to medium-term product with no overhang could prove a better choice.
For example, some longer-term fixed rates have temptingly low rates, but the penalties can be hefty if things do not go according to plan.
While these types of product are generally portable to a new property, the danger is that if the borrower needs to move and take a bigger loan, they will need to accept one of the lender’s products available at the time. The chance of the lender still having the best rates at that times are slim.
Even more catastrophic would be if the new borrowing requirement was outside the lender’s criteria, resulting in the penalty being incurred after all, as the borrower has to search for a more flexible lender.
Those who can make good use of these long-term deals are those who have settled down and simply want to forget about their mortgage and any worries over fluctuating payments.
David Hollingworth is a mortgage specialist at London & Country