How Long Should You Fix Your Mortgage For?

When fixing a mortgage, is it cheaper to fix it for longer or shorter periods? One Fool questions whether it matters.

Increasingly, my view of financial products is that they are all the same product packaged differently. I guess I'm jaded. Still, jaded or not, I intend to pursue this theory further now by looking at fixed-rate mortgages.

The first question I'll try to answer is 'How long should you fix your mortgage rate for?' Ultimately, the question I really want to answer is: 'Does it really matter?'

To do this, I'm going to compare mortgages to see whether it's cheaper to stick with one fixed-rate deal for a long period, or should you switch more frequently. Each of the examples will be based on a £180,000 repayment mortgage on a £200,000 house. The joint salary of my imaginary buyers is £45,000. The mortgage term is 25 years.

Two-year fixed

Using The Motley Fool's mortgages search engine I looked at the cheapest fixed-rate mortgage deal lasting two years. To find the cheapest over the two-year period, the true cost including fees is the important figure. With this in mind, I chose to calculate the true cost of the mortgage over two years and then sorted the table by the column 'True Cost Over Period Chosen.'

Abbey came top in this search. The interest rate is 5.39%, so you'll pay £1,094pm. You also pay a £299 arrangement fee, a £295 valuation fee and a £225 exit fee. I include the exit fee, because I'm assuming that you'll switch to a cheaper deal every two years.

Now, let's make a big assumption: we'll say that interest rates remain the same as today, on average, over a ten-year period. This means that (competition forces permitting) you might expect to find similar deals every two years over the ten years.

Here's the total cost of your mortgage including fees, for various periods. Remember all these figures assume that you'd be switching deals every two years.

Total cost when switching between two-year fixed-rate deals

Two years: £27,100
Five years: £67,700
Ten years: £135,400

However, I think that cunning Fools might pay a bit less than this. Every two years you would attempt to negotiate with your current mortgage company. If you negotiate another deal you'll save on fees.

Five-year fixed

Now let's look at five-year fixes. Same rules as above. Excluding some strange errors in the table, Nationwide Building Society came up top. The interest rate is 5.34%, so you'll pay £1,088pm. You also pay a £499 arrangement fee, a £340 valuation fee and a £90 exit fee.

Assuming you switch once every five years, here's how the costs stack up:

Total cost when switching between five-year fixed-rate deals

Two years: £26,500
Five years: £66,200
Ten years: £132,400

Ten-year fixed

You can get the same Nationwide deal fixed for ten years, and this one is also a table-topper. To remind you, this is 5.34% paying £1,088pm. The arrangement fee is £499, the valuation fee is £340 and the exit fee is £90.

Total cost of a ten-year fixed-rate deal

Two years: £26,300
Five years: £65,800
Ten years: £131,500

You'll notice that the true cost figures are lower than the five-year fixes, because you pay fewer fees.

Which is cheaper?

Based on pure numbers and the assumption that interest rates don't change, longer deals are better:

Cost over ten years

In the above example you'd save about £4,000 by getting a ten-year deal than by switching every two years. However, don't forget that with shorter deals you can re-negotiate with your current provider which will save on fees. That makes the costs much more of a muchness, as I speculated at the beginning.

I'd like to spend a moment qualifying the examples above, because interest rates aren't constant. If interest rates drop by an average 0.5% over the ten years, based on some quick searches I've done, you'll probably save about £3,000 by switching between tracker deals instead. Of course, you could pay several thousand pounds more if rates go up by a similar amount. And, of course, rates could swing a lot more than 0.5%.

Also, if you switch more frequently between fixed-rate deals, you'll be more subject to changes in interest rates, for better or worse.

Related mortgage tips

• Remember when you switch to keep reducing the length of the mortgage, or you'll pay thousands more in interest for the privilege of extending it.
• It's not all pure maths: personal circumstances matter as well. If you reckon your budget or income over a longer period is shaky, fixing for longer for peace of mind seems like a good idea. However, if you're thinking of moving in the near future it could get awkward if you have a longer fix, because of early redemption penalties.

What do I reckon? Longer or shorter deals?

Based on the assumption that interest rates remain the same, long-term deals seem to have the edge. If we remove this assumption though, it turns out it doesn't matter much: same deal, different packaging. I reckon the same could be said for all the mortgage deals out there. It's all one product, calculated to give the mortgage companies roughly the same profit regardless.

However, mortgage companies do have a second product and that is mortgages which aren't deals. If you're not in a discount, tracker or fixed-rate mortgage then you're probably languishing on a mortgage company's standard variable rate (SVR), and you're paying thousands more than you should.

In conclusion, then, it might not matter so much what deal you're on (personal circumstances excepted), but make sure you're always on some sort of deal. That way you're certain to be richer, and less jaded, than other Fools!

> Compare mortgages through The Fool.
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