Is a long term fixed rate mortgage right for you?
With house prices rising and mortgage capacity constrained by loan to income and loan to value multiples, could long-term fixed-rate be the answer and does slow and steady win the race?
The price of certainty
Research from Kensington Mortgages found that more than 80% of homeowners and those looking to buy a home would consider paying a £1,200 premium for a long-term fixed-rate mortgage.
Kensington polled 2,000 renters and 2,000 homeowners and called the extra cash people were willing to pay a ‘certainty premium’
The research found that there was a lack of awareness among homeowners and homebuyers about long-term fixed-rate mortgages with around one in four (26%) believing that the longest fixed-term fixed-rate mortgage is between two and five years, with just over one in ten (12%) saying a long term mortgage could last up to 40 years.
Not surprisingly among renters and aspiring homeowners seven out of ten (70%) would consider a long-term fixed-rate mortgage if it meant that they could afford to buy a home instead of rent one. Among homeowners, three quarters would consider a long-term fixed-rate mortgage if it allowed them to borrow more and buy a bigger home.
Borrow more for less
The advantage of a longer-term mortgage is that the monthly payments are lower and the reality of life is that cash flow is king. Borrowing 3.5x a £75,000 income at a 2% mortgage rate over 30 years rather than 25 years reduces monthly payments by £142 from £1,110 to £968 a drop of 13%.
Cheaper but more expensive
But there is no such thing as a free lunch… in the example above the monthly payments may be lower, but you will be paying them for 5 years longer – that is an additional 60 payments. Paying back the loan over 30 rather than 25 years will cost you an additional £15,480…
Mortgage rates are low now, but what happens when they are higher
It makes great sense to arrange a long term fixed rate mortgage whilst mortgage rates are low. Mortgage rates are at or near historic lows and from here, over the long term, the only way is up.
Could the price of certainty be too high?
However, when mortgage rates are higher a long term fixed-rate mortgage may end up costing you more if you miss out on a period of falling mortgage rates. It is therefore very important to check how much you may have to pay to exit a long-term fixed rate because you might find that the cost of certainty is higher than you think…