Are 15-year fixed-rate mortgages a price worth paying for security?

Which button to press? Long-term mortgage planning can add security but it has its pitfalls if you need to move in the short term.

 Which button to press? Long-term mortgage planning can add security but it has its pitfalls if you need to move in the short term. Photograph: Olivier Le Moal/Alamy

With the value of sterling a fraction of what it was three years ago, the threat of post-Brexit food shortages and the prospect of a recession looming, British households could be forgiven for seeking some sense of calm and consistency in their finances.

For many, that may come in the form of knowing how much they will have to pay to keep a roof over their head, no matter what happens to interest rates in any future turbulence.

A number of 15-year fixed interest rate mortgages have hit the market offering just that security, meaning homeowners will know exactly what their spend will be from now until 2034. But although they give the security of a set monthly bill, should you sign up?

The new deals

Virgin Money announced it was offering a 15-year fix at the end of July, the first time such a loan had hit the market since 2009, in the midst of the financial crisis. Its offering gives rates of between 2.55% and 3.75% depending on what the value of the loan compared to the value of the home is.

Yorkshire building society then followed this with a 15-year fix offering 2.79% to 3.65% depending on the loan-to-value ratio.

Commentators suggest various reasons for the arrival of the new mortgages, with some saying they offer security to a market of homeowners who want to insulate themselves in a fraught economic period.

Others say that lenders are simply testing out new products at a time when economic uncertainty has led to a fall in long-term interest rates.

“As the spread between the cost of funds to lenders borrowing for shorter terms and 15 years has narrowed, it has become possible to offer a 15-year fix at a rate sufficiently close to five- and 10-year rates for lenders to believe there will be a demand,” says Ray Boulger of mortgage broker John Charcol.

While it is expected that there may be more similar loans in the future, the offers could also be withdrawn with little notice, adds Rachel Springall of financial website Moneyfacts.co.uk.

But are they for me?

For many, the advantage of a fixed term will be knowing exactly how much they will be paying every month for the next 15 years, providing consistency among whatever fluctuations the economy throws at them. However, it is only at the end of the term that borrowers will be able to look back and assess whether it was a good idea.

“Longer-term fixed rates do carry higher interest rates than their shorter-term counterparts so there is a cost for long-term stability. That price may be well worth paying, of course, if rates rise in future but will inevitably cause borrowers to consider whether they opt for a lower rate now and review in the future,” says David Hollingworth of London and Country Mortgages.

They are best suited to people who are in their “forever homes” and have no plans to leave and want to insulate themselves from risk, says Chris Sykes of Private Finance mortgage consultants. Those who want to move, however, may face problems.

“Although the majority of deals are portable – so they can be taken to a new property – there are no guarantees that the borrower will still meet the lender’s criteria, or what rates would be available on any top-up borrowing that might be required,” says Hollingworth.

Is there a sting in the tail?

Once you are in, it can be expensive to get out. Commentators have been quick to point out that the early repayment charges (ERCs) – fees for paying off the loan too early – can be very steep.

“Much can happen in 15 years. Most borrowers are happier fixing for a shorter period, and as a nation we tend to remortgage every couple of years,” says Adrian Anderson of brokers Anderson Harris.

“Five-year fixes are very popular and look good value compared with two years. Some borrowers are looking at 10 years but 15 years takes it that stage further.”

“Virgin’s 15-year fix also has high ERCs (8%) until 1 January 2025. On a £400,000 mortgage, this works out at £32,000, which is a lot of money.”

In the case of a couple splitting up, this could result in a substantial cost at a difficult and emotional time. “Even someone who expects to stay in their property may need to move for reasons completely unforeseeable, which is why ERCs are important; for example a significant minority of couples will split up during the 15 years and may have to sell,” says Boulger.

What’s next – a 20-year fix?

Fixed interest mortgages over 20 years are a feature of some European countries and Hollingworth says there have been terms of 25 years in the past.

But if these longer terms do come in, so must more consumer-friendly terms, says Boulger. “Now is an ideal time for lenders to look at offering a 20-year fix, or better still a 25- or 30-year. I expect to see terms longer than 15 years on offer by next year, but the longer the term the more important it will be for the ERCs to be consumer friendly,” he says.

So should you sign up?

A long-term fixed mortgage is clearly not for everyone and may be most attractive to those seeking financial security, having found the home they will spend the rest of their lives in. But while the current low interest rates allow banks to offer such deals, they should also be used by consumers to settle their commitments early.

Springall says: “Where possible, borrowers would be wise to take advantage of the low rates and attempt to overpay to build up more equity and reduce their mortgage term. Doing this can move borrowers into a lower loan-to-value bracket and enable them to find a cheaper mortgage which can lower their monthly repayments when they refinance.”

[“source=theguardian”]