The best long fixed rate mortgages

Housing minister Grant Shapps wants lenders to offer 30 year mortgages. Robert Powell looks at whether this is a wise suggestion and runs down the best fixed rate home loans...

A lot can happen in thirty years: my life (and then a bit) for a start.

But is three decades really an appropriate time to stick with one mortgage?

According to the housing minister, Grant Shapps, it is...

30 year mortgage

Yes, Mr Shapps has called for lenders to offer more thirty year mortgages. The minister said it would “help families on tight budgets know exactly where they stand when they are buying a home”.

But he has been roundly criticised by commentators for pushing what is perceived to be an outdated concept that has little appetite among homebuyers.

And indeed, in the current volatile economic climate, can anyone really be certain as to what they’ll be doing and where they’ll be living in three decades' time? Well, history suggests not.

Long-term mortgages have already been tried in the past, with little success. A sparse uptake suggested that borrowers wanted more flexibility with their mortgage and were hence reluctant to fix for longer than five or at a push ten years.

But that’s not to say the long term fix is itself a bad thing – it’s the accompanying early repayment charges that really kill all flexibility.

Early repayment charges

The – it has to be said, tiny selection of – long-term mortgages that have been previously offered were such a risky deal for borrowers because of the extortionate fees levied by the lender for ditching the deal early.

Take Nationwide’s 2007 25-year fixed rate mortgage. The deal was priced at 5.49%. Not outrageously unreasonable in context, considering the Bank of England Base Rate at the time was 5.5%.

Fast forward two years (less than one tenth of this mortgage’s life!) and the base rate had dropped by 5 percentage points to its current 0.5% level, spurring a raft of cheap mortgage deals. But for the homeowners that plumped for Nationwide’s long term deal, exit strategies were few and expensive. This particular mortgage carried a 3% early repayment charge for the first ten years. That’s a huge £6,000 penalty on a £200,000 loan.

Yes, you could argue that the 2008 crash was an extraordinary event that caught everyone out. But market conditions are hardly settled at the moment. Who knows when the next ‘extraordinary event’ will come round and leave those locked into a mammoth-term fix crying into their teacups and imagining what they could have spent that money on.

Biologist JBS Haldane’s famous quote springs to mind: “The universe is not only queerer than we suppose, but queerer than we can suppose”. Just replace the word universe with ‘mortgage market’.

In the loop

Outside of huge early repayment charges, long term fixes – providing they’re at a reasonable rate – are no bad thing. Here's a good example of how a long term mortgage, with an original twist, can result in a good product.

The fixed rate deal, from a now defunct lender called 'In The Loop', was offered at 4.99% at 2009. However, unlike most long term fixed rate deals, the borrower was allowed a one-month window every five years in which they could redeem without penalty. Outside of this window, the redemption penalty reduced each year from 5% in year one to 1% in year five.

Granted, in context if you had opted for this mortgage in 2009, you’d probably be gazing at it with disgust in light of current rates. But in principle, this deal shows how a long term mortgage – with some tweaking to the early repayment charge structure to make them more flexible – could be a good deal for some settled borrowers.

Fix for longer at the same price

So what long term deals are around at the moment?

Well, they may not be the largest terms on the market, but you could do far worse than Chelsea’s 5,6,7 range of mortgages. Offered at three separate LTVs, they allow you to fix your mortgage for six or seven years at the same price as the five year loan. In my book, this is a fantastic deal.

Here are Chelsea’s rates:

So, 3.69% with just a £395 fee for a full seven years: very competitive.

However you should be planning on staying put for the full mortgage term if you do go for one of these deals, as the early repayment charges are fairly hefty.

The five year deals have a 5% charge if you leave in the first three years, 4% for four years and 5% for five. The six year fix has a 6% charge if you repay fully in the first year, 5% for four years, 4% for five and 3% for the full six years. The longest seven year mortgage has a 6% charge if you bail out in the first two years, 5% for five years, 4% for six and 3% for seven.

Ten year mortgages

Here are a few of the ten year deals currently on the market:

As you can see, fairly reasonable rates for a full decade of security. But if you do opt for one of these lengthy deals you should be totally and completely positive that you’ll stick in the property for the full term. As if you don’t, you’ll be hit with a huge early repayment charge starting at either 7% or 6% and gradually decreasing over the full decade.

Five year fixes

Finally, here’s a brief round-up of the best five-year fixes on the market at the moment:

What do you think?

Would you ever take a 30 year mortgage?

Have your say using the comment box below.