Over the last few weeks we have seen fixed rate mortgages hit record low rates and even falling below 1% pa at one point. Added to this is that mortgage product availability is now at pre-Credit Crunch Crisis levels meaning that there are more lenders and products vying for your business.
Should you choose and short (1 or 2 years), medium (3 to 5 years) or long term (10 years+) fixed rate mortgage?
With 5 year deals at around the 1.1% pa and 1.2% pa, they are staggeringly competitive compared to the late 1980s when rates where 15-16% pa. The question is not whether rates are competitive or not, it is about what your likely needs and requirements are going to be over the coming years.
Clearly, securing a cheaper fixed rate deal before interest rates rises is an attractive prospect but we urge you to think about your likely needs.
Are you likely to pay off your mortgage, sell, move out to rent it or need to redeem it or cancel it sooner rather than later? Short term deals may be more attractive to avoid early redemption penalties.
If you are likely to move in the time frame, check that any new mortgage has portability options i.e. you can transfer the rate to a new property. Remember, if you downsize, you may face redemption penalties if you have a mortgage of say £150,000 on a £200,000 property and then you downsize to a property worth £150,000, you will likely face penalties.
If long term, again, look for the flexibility options re moving, downsizing, upsizing or even when the redemption penalties end.
Medium and longer term deals will likely offer slightly higher rates but this means you do not have the issue of remortgage costs every 1 or 2 years if you went for a shorter term deal.
Existing Lenders: Always ask your existing lender if they can price match any deal you have found.
Advice: If you take mortgage advice, the mortgage adviser is liable for the suitability and affordability of the mortgage if things goes wrong, if you DIY then you can only blame yourself. In addition, mortgage advisers will likely have access to a wider range of ‘broker only’ deals added to those available on the open market and they will usually get paid a procuration fee or commission to assist with their fees.
Either way, you also have to look at the fees involved. Just because a deal is 0.1% or 0.4% pa lower rate does mean it is cheaper when you look at application fees, survey fees, legal costs. When all these are added together, will the mortgage interest rate savings make up for the additional mortgage fees? This needs to be calculated over the term of the mortgage, not just at day 1.