When it comes to selecting a fixed rate mortgage deal, should you lock-in long-term or short-term? We look at your options and weigh up the differences between the two.
With interest rates at the lowest they've ever been, now could be the perfect time to lock in to a fixed mortgage deal.
As well as giving you the security of knowing that your repayments will stay the same for the foreseeable future, it's unlikely you'll miss out on further rate drops with the Bank of England base rate standing at 0.5%.
So fixing while rates are low can seem an attractive option, but you'll have to decide whether to fix short or long term. A short term deal of a couple of years could offer you flexibility, whereas long term deals of 5 years or so can give you unrivalled security. We look at the advantages vs. disadvantages of fixing in for a long vs. short term deal.
The benefit most popularly associated with fixing into a short-term deal is the flexibility such a short fix offers. They offer all the advantages of a fixed rate deal such as knowing exactly what your repayments will be, but only tie you in for a couple of years. In this way they offer a good mix of security and flexibility. Short term deals also tend to offer more competitive rates than longer term.
If your deal becomes less competitive over your short term, i.e. rates are dropping or other mortgage products on the market are offering a better deal, you can look at switching your mortgage as soon as that term ends. You can keep an eye on changes in the base rate and fluctuations in the mortgage market throughout the couple of years or so that your term lasts. If during this time you think you could get a better deal, you won't have long to wait before remortgaging.
On the other hand those fixed in for a longer term will have to wait longer to do so if their deal becomes uncompetitive, because it's unlikely they will want to pay out for early redemption charges and the like by breaking the deal prematurely.
Short term deals are best for those who don't want to commit to a long deal - after all, you can't predict what your circumstances will be in 5 or 10 years' time. So by fixing for the short term you give yourself security for a couple of years but also the freedom to re-evaluate your situation, not to mention the mortgage market, after the term is up.
Although fixing short-term does ensure you some measure of security, this is only temporary and you'll soon have to look at remortgaging when that term is up. If extended security of five years or more is what you're after, a longer-term fix will suit you much better.
You should also take into account the fact that you'll have to re-arrange valuations and application fees again when your term ends. As well as being an unnecessary hassle to sort through every couple of years when your short term expires, this can be incredibly costly. Long term deals mean you can put your mortgage to the back of your mind for several years while you continue to repay the same amount, but short term fixes mean you'll have to deal with these fees and arrangements every time your term ends.
It's also worth bearing in mind that in the current economic climate competitive deals are harder to come by. Because of this reduced mortgage availability you may find yourself stuck for options when your short term deal ends - making long term fixes a more attractive alternative.
Long-term fixes present a more stable alternative to short term deals simply because they lock you in for longer. This means that you're protected from any rises in interest rates for the duration of the term. With the base rate at such a low at the moment, it's logical to assume that 'the only way is up'. Therefore by locking yourself into a long term fix while rates are low, you may be able to beat the effect of future rises.
Long term deals mean that for as much as 5, 10, or in some cases up to 25 years, you will know exactly what your repayments will be month by month - because your rate will not change during that time. This will suit those who want or need to have stability and constancy in their finances.
When you know exactly what you have to repay every month, you can budget accordingly. Considering that mortgage repayments are one of the largest regular household expenditures, having control over them in this way could really benefit you.
It's also worth noting that with a long-term deal you'll pay one arrangement and valuation fee at the beginning of your term, and won't need to deal with this cost again until your long term ends. In this way you're spared the hassle of having to hunt for a new competitive deal every couple of years and then pay new arrangement fees, as you would with a short term deal.
The interest rates on a long term deal tend to be slightly higher than short term deals. This means it's possible in some circumstances for a long term deal to cost you more than short term, if the cost of interest over the term outweighs the cost of remortgaging every couple of years.
However the factor most likely to make you reluctant to fix long term is the unpredictability of future interest rates. We can only speculate if rates will go up, down, or stay the same, and so locking in on a long term basis means you have to take a gamble on what you think will happen to the rates over the next few years.
If rates go up and you are tied into a low rate, all well and good - but if they stay the same or drop further, you may find your long term deal becoming quickly uncompetitive. What's more, long-term deals offer little in the way of flexibility so it's unlikely you'll be able to remortgage or switch before your term is up.
Penalties and charges usually apply if you want to get out of your fixed deal early. Therefore you may find yourself stuck with a deal that's costing you more than it has to but with no easy way out. However, it is worth mentioning that many long-term fixes do allow you to transfer your mortgage to a new house if you decide to move mid-term.
Making a decision on a short or long term fixed deal always involves consideration of lots of factors that, depending on your circumstances, could benefit or disadvantage your finances. It's a good idea to get advice from a mortgage broker before going ahead with anything.
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