Is it time for a long-term mortgage lock-in?

Tuesday, 20 January 2009 10:55

With interest rates now at a record low from the Bank of England and high street lenders sluggishly following suit, Daniel Barnes investigates whether now is the time to lock in for the long-term.

Before the credit crunch struck, much of the debate in the mortgage market was over how longer-term deals and fixed rates for ten or fifteen years could add stability to the property market.

There was widespread fear that those hooking into cheap fixed rate deals could be burnt when refinancing at higher rates to face a payment shock.

Once again we are facing a period of low interest rates, so is it time to lock in while rates are low?

"Long-term rates are a gamble, but not such a big gamble," explains Gordon Swan, at online mortgage firm mform.co.uk.

Lloyds TSB, under the Cheltenham & Gloucester (C&G) brand, has launched a ten-year fixed rate mortgage at 4.99 per cent with a £995 fee, or at 5.59 per cent with no fee.

The dilemma is the same lender offers a two-year fixed rate mortgage at 3.69 per cent (with a 2.5 per cent fee).

And as short-term fixes have seen their prices drop, long-term fixed deals have not been following suit so dramatically.

James Sadler, at Mortgage27.co.uk, explained long-term fixes are being welcomed by those who have felt high rates before.

"People going for long-term fixes are those who have suffered high interest rates before and have seen the cycle."

The decision left is whether you want the security of long-term fixed repayments, or whether to risk lower rates now with the uncertainty of where they will be in two or three years' time.

Interest rate increases?

Much of the debate on whether to take a long-term mortgage fix rests on where interest rates will go in the coming two or three years.

The events of the last year show the economies of the world can buck and twist at breakneck speed.

In January 2008, who would have thought a year later the Bank of England would have cut interest rates to a record low?

Who now will be brave enough to guess where rates could be in 2011 or 2012?

But with rates at a record low - and likely to drop further in the short-term - it is fair to assume interest rates will be rising over the coming three years.

Eleanor Ross, at Lloyds TSB, explained mortgage rates are now below the ten-year average of 5.84 per cent.

"We are heading to the bottom of the market, so it could be an idea to take advantage of low long-term rates and lock in as soon as possible."

She explains the Swap rates - at which fixed-rate mortgage deals are set - are already factoring future Bank of England interest rate cuts, so further drops to long-term deals were unlikely.

"Rates on long-term fixed deals could fall by another couple of basis points, but not a huge amount, so it is not worth waiting," she says.

Mr Swan explains the fall in rates on fixed rate deals could soon be coming to an end.

"The cost of finance for banks for fixed rate deals has continued to edge down and the trend is still down. But it looks like it is starting to flatten."

"It could be the bottom for fixed rates."

However, Mr Sadler is expecting further cuts to long-term mortgage rates to come onto the market.

"Long-term mortgage rates are still high," he explains.

"My advice is to people to wait for the next few weeks for more competitive products to come into the market."

He explained lower rates and long-term fixes on higher loan-to-value (LTV) percentages should soon come become available.

"A ten-year fix at a rate of under five per cent would do rather well," Mr Sadler explained.

"It is a strange world we are in when tracker rates are higher than standard variable rates. While trackers at three per cent over base rate may seem competitive now, if rates go back up they will be expensive."

SVR or long-term fix

With lenders' standard variable rates (SVR) dropping - although not always as much as the Bank of England cuts - staying on with a lender after a fix is becoming more popular.

Traditionally a cheap fix would end and the higher SVR would bite. Now this is not always the case.

Mr Swan explains SVRs are appearing popular at the moment as the rates are dropping.

"It is also fee-free. There is no cost to get in at the end of a fixed-rate deal and you can jump out."

Mr Sadler advises those looking for long-term fix on a remortgage to stay on a lender's SVR for now and wait until fixes come down in price.

Ms Ross meanwhile explained while SVR rates are low and could be advisable for those looking for no ties, dropping property values also add a push to lock into a fix.

"With falling house prices, loan-to-value rates maybe decreasing too," she said.

She explains by waiting to remortgage onto a fix, equity may be eaten away on a property by falling house prices, so while, for example, an 80 per cent LTV deal could be an option now, later in the year it may not be.

Who is going for long-term fixes?

High loan-to-value rates on long-term fixed rate mortgages mean the market is currently focused on remortgagers and home movers with equity behind them.

While lenders are expected to drop LTVs on longer-term deals in the coming months, the deals could still be out of reach.

"Long-term fixes appeal to families who are looking to get rid of the remortgage headache once and be able to budget with fixed repayments over the long term," Ms Ross says.

However, she added Lloyds TSB was always looking to revise products in future to possibly expand the LTV range, and a few first-time buyer long-term fixes are starting to appear on the market.

Hailey Lawell, at Britannia Building Society, who herself is on a ten-year deal, said: "In the current environment now is the time to go for a fixed rate."

However, she explained fixed rate deals have not traditionally been popular in the UK.

"Some people have been afraid to make a long-term decision. Others don't know what their circumstances will be and want something flexible in the short term."

Recent years have seen borrowers looking for the cheapest two-year deal and remortgaging to the next after the term - skipping from cheap deal to cheap deal.

However, the rise in mortgage fees of late - as lenders look to make up the costs of losing customers - has made this mortgage skipping less attractive.

Mr Swan says: "There are some monumental fees out there."

And so paying fees once and fixing a mortgage for the longer-term has gained more interest.

"With fixed rates you also get the element of security," explains Ms Lawell.

"They are being taken by people who want security for the longer term. Those with young families who want to organise the mortgage and forget about it."

"In the current environment rates are low, but there is no guarantee they will stay low."

Long-term fixed rate market today

While short-term fixed rate mortgages are dropping, the long-term mortgage market has not seen much movement of late.

Yorkshire Building Society & Barnsley Building Society have had their rates unchanged for the last month.

Principality Building Society is offering a rate of 5.49 per cent at a higher loan-to-value of 75 per cent and with no arrangement fee.

Halifax's rate has reduced recently by 0.20 per cent, while Britannia is offering a fee-free range of deals and their ten-year rate at 90 per cent LTV was at a rate of 6.59 per cent.

West Bromwich have pulled a fee-free deal, but still have 5.39 per cent fix with a £999 fee.

"There hasn't been too much movement in the long-term fixed rates amongst other lenders over the last month although there have been a few lenders pull out including Woolwich and Derbyshire," explained Denise Harvey at Moneyfacts.co.uk.

10 year fixed-rate mortgages

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