Mortgages for up to 25 years now offer the best deals for homeowners, says Nic Cicutti
TENS of thousands of mortgage borrowers in Scotland face huge hikes in their monthly payments as their current fixed deals come to an end in the next few months. For many, the hunt will be on for the best available two or three-year fixed mortgage.
But some experts are urging homeowners to look instead at long-term fixed and tracker deals lasting up to 25 years. While longer-term deals used to be more expensive, they are now looking more affordable.
The new advice from experts comes as a Government-sponsored report by former Halifax Bank of Scotland chief executive Sir James Crosby says low-priced mortgages may be hard to find during the present credit crunch and the mortgage crisis could last until 2010.
For many years, experts have argued that short-term fixed mortgages for two or three years were the best option for borrowers, offering a combination of low costs and payment security for a limited period.
By switching every time a deal came to an end, borrowers could avoid redemption penalties and pay significantly less overall.
But new research from independent mortgage broker Savills Private Finance, which has offices in Glasgow and Edinburgh, suggests that long-term mortgages are now cheaper than short-term options when the full costs associated with remortgaging every two years over a 25-year term are taken into consideration. This is even more so the case in Scotland, where homebuyers are often excluded from the "free legal and valuation" deals available south of the border.
According to Savills, someone with a 200,000 interest-only loan could save 18,480 in interest over 25 years if they opted for a long-term fixed rate rather than remortgaging every two years.
This assumes they take Scarborough Building Society's deal fixed at 6.09% for 25 years, rather than going for First Direct's current fix at 5.98% and remortgaging onto a deal at the same rate and fee every two years.
The Scarborough deal has an arrangement fee of 995, while the fee on the First Direct deal is 1,998. You would pay 305,495 in total over 25 years with Scarborough and 323,975 with First Direct.
The figures assume that the arrangement fees are added to the loans. Legal costs are included in the First Direct mortgage deal, but not valuation fees or the final admin charge for closing a mortgage. These typically add another 300 every time someone switches between providers; potentially an extra 3,500 over a mortgage's lifetime.
Melanie Bien, a director at Savills Private Finance, says: "With the cost of two-year fixed rates in particular rising in the past year on the back of higher swap rates, longer-term fixes appear more attractive in comparison.
"The greatest advantage of fixing for a long period of time is that it removes the need to remortgage every couple of years which, with rising arrangement fees, can be expensive. Fees remain competitive on long-term fixes, plus you only have to pay them once.
"The downside of fixing for 25 years is that there are often hefty early repayment charges if you try to clear the mortgage early or switch to another deal."
Louise Cuming, head of mortgages at the price comparison site Moneysupermarket.com, says: "My argument against long-term fixed rates has never really been about rates, in the sense that none of us have a crystal ball and know what we might be paying several years from now.
"It's more down to the fact that redemption penalties on long-term deals are fixed for long periods of time, sometimes 10 years and even longer. This meant that if you were coming out of a relationship, for instance, and needed to sell the property, you were faced with a large charge when repaying the mortgage.
"That said, Manchester Building Society charges 6.25% for 30 years but you are only tied in for 120 months, so the straitjacket is not as tight as it was.
"Besides, it is getting to the point where some arrangement fees on mortgages are running to thousands of pounds, which are then added to the loan. If you pay off the mortgage early, even if there is no penalty, you are still paying for the cost of the arrangement fee in the final bill. So I'm less convinced by my original argument than I used to be."
Other long-term deals in the market include Nationwide Building Society's 25-year fixed rate, priced at 6.53%. The deal comes with a 599 reservation fee and a 3% redemption penalty in the first 10 years.
For those more interested in a shorter-term fix, Nationwide's 10-year deal is priced at 6.39%, while a five-year option is set at 6.18%. All have the same reservation fee and 3% redemption charge.
A Nationwide spokeswoman says: "One of the things we recognise is that longer fixed rates are not for everyone.
"However, they do offer long-term stability for people who know that whatever happens in the outside world their mortgage rate will never change. This can be useful for people who work in industries where incomes do not grow as rapidly as others."
Ray Boulger, senior technical manager at John Charcol, independent mortgage brokers, agrees that long-term mortgage deals may make sense in the current climate. But he prefers so-called 'lifetime trackers': mortgages pegged at a fixed point above the prevailing Bank of England base rate throughout their lifetime.
Boulger says: "I have one of these mortgages myself. This time last year we were selling lifetime trackers with a differential of about 0.4% above the base rate.
"Today, the cheapest rate is a new deal from Woolwich, at bank base rate plus 0.69%. There is a fee of 995 and there are free legals. However, it is only available on a loan-to-value (LTV) of 60%. For LTVs of 90%, the Woolwich lifetime tracker rate is bank base rate plus 1.59%.
"For those on higher LTVs, the next cheapest is an HSBC lifetime tracker set at bank base rate plus 0.79%. This has a 599 booking fee plus additional charges.
"When you consider the possibility of rates falling further some time in the coming year, plus the point of not having to refinance your mortgage every two years, lifetime trackers look very good."
Boulger also tips Nationwide's lifetime tracker, priced at 0.98% above base rates.
Although this is more expensive than some deals, it comes with a so-called 'drop-lock' option which allows borrowers to switch to another of its fixed mortgages at any time without penalty.
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