At Perenna, we think it’s time to set the record straight about long-term fixed rate products and demonstrate why these mortgages could offer better value and flexibility than consumers may have been led to believe.
Myth #1 – Long-term fixes are expensive compared to short-term options
Short-term fixed-rate mortgages might offer a cheaper headline rate, but borrowers could be hit with heavy product fees when they need to remortgage every two, three or five years.
A typical product fee is £999 to £1,500 – over the course of a 30-year mortgage term, borrowers could pay nearly £22,500 when consistently opting for a short-term two-year product. With a long-term fixed-rate mortgage of 30 years or more, these fees are considerably reduced because consumers won’t need to remortgage as often.
Myth #2 – Borrowers spend much more on interest on a long-term mortgage
Data from the Financial Conduct Authority previously found that more than two million borrowers were on their lender’s standard variable rate (SVR). These borrowers end up spending thousands of pounds more in interest than they should. For example, a two per cent increase for three months is a cost of £1,250 on a £250,000 mortgage, if you have that 15 times over a term there is another £18,000 (this all adds over 0.5 per cent to your rate in real terms).
By locking into a long-term fixed-rate mortgage, consumers will have fixed monthly payments for the long term and won’t have to worry about moving on to an SVR.
Long-term fixes don’t always have to mean higher interest rates either. In established long-term mortgage markets like Denmark, rates for these products are comparable. That’s because these mortgages operate on a different model by linking to the long-term bond market.
Myth #3 – The low-rate environment favours short-term borrowers
Rising inflation and costs are putting pressure on the Bank of England to increase the base rate, which could result in higher mortgage rates. Most borrowers in the UK have a mortgage which offers little protection from these rises, as those locking into shorter-term products could soon find themselves facing much higher rates when remortgaging.
Every one per cent in additional interest when refinancing over a 30-year mortgage term adds up to £5,000 on a two-year fix or £12,500 on a five-year fixed. With long-term fixed-rate mortgages, borrowers can lock into a low rate and have regular monthly payments that won’t follow rising rates.
Myth #4 – Long-term fixes are not flexible
Traditional long-term fixed-rate mortgages currently available in the UK can come with costly and lengthy exit fees, but this could soon change. Flexible fixed-for-life mortgages will give homeowners all the same freedoms of a shorter-term mortgage. With Perenna, consumers will be able to remortgage without any exit fees after just five years.
So, if rates go even lower or if a person’s circumstances change, they’ll be able to switch without facing onerous charges.
Myth #5 – There’s already plenty of choice in the mortgage market
From high loan to values to housing schemes, there are already hundreds of mortgage options available to choose from, but we believe that the choice available to borrowers is still restricted by the short-term nature of Britain’s mortgage market.
For many borrowers, the choice of long-term fixes remains far too limited. The solution, which has been proven in other markets such as the USA, Germany and Denmark is flexible, fixed-for-life mortgages.
