When you look around the news channels today or peer through the vast amount of newspapers and other magazine you cannot escape one ugly fact: the economy is bad. Regardless of what people are saying we have no idea when we will hit an upswing only that it will eventually happen. There are many things we, as homeowners, can do to help ourselves out of the proverbial weeds. One possibility, and the basis for this article, is getting a mortgage that is not only fixed at a rate but is also retained for a long period of time. What this means for you is that you will know how much, per month, you will be paying to the lender which means your other financial obligations can be planned around your mortgage.
If you want to compare the fixed-rate mortgage loan to those that use a variable interest rate you will notice some very bad things. Unlike the fixed-rate the variable mortgages can rise and fall like the tides of the ocean. This means you may not always be very clear what you have to pay out each month so then your other obligations may be late or simply not paid at all which just means a bad credit score for you. I do not mean to say that the variable rate mortgages are bad because their benefits certainly are there and it really depends on your circumstances. In a stable economy they may work out better than a fixed-rate mortgage loan but when the economy is fluctuating as it is the uncertainty is pretty high.
In the past the loans for a fixed-rate mortgage only lasted a couple of years; two – five at the most. Times are changing now because lending institutions realise that their customers (new and old) need stability. They have to be comfortable from the onset of the loan and if they are not then bad things can happen not to just them but to the customer as well. Over the last few years lenders have begun to give fixed-rate loans like they have for variable-rates! You can now actually get a fixed rate loan over long periods – in excess of five years, and incredibly you can now get fixed mortgages over the full 25 year period !
What follows is a much unbiased look at the reasons why the fixed-rate loans are good but also possible cons to them.
Pros of Fixed-Rate and Long-Term Mortgages
Security in the Long-Term
Let us face the easy reason why fixed-rates are good: possible long-term solution! Unlike their counterparts you will know how much your mortgage is for EVERY single month! Instead of being secure just one, two or three years you can be secure for 25 years! What this means to you in the long run is that you will be fully aware how much of your income, every month for up to 25 years, is going to have to be paid out. This allows you to have the ability to plan all of your other bills out a lot easier than you have been able to otherwise. The rates may prove to be a little higher but that’s a small price to pay when you won’t be hit with a huge rise in your rates (one of the main risks in variable rates).
One Arrangement Fee to be Paid
When you are getting a fixed loan payment for a short period of time (1-3 years) the chance that you will pay an arrangement fee is higher. You should expect to pay the arrangement fee every 2 or 3 years as you renew your loan. In many cases the lender you choose will figure this amount into your loan as added interest so then your monthly payment will also increase. Currently the average arrangement fee is roughly £860. That is a lot of money to be added EACH time you renew and is just an added burden.
Selecting a longer period for your fixed loan means that you usually will only pay one arrangement fee. Of course you wonder if this fee would be higher since the lender will be losing out every couple of years but in many cases it is roughly the same! That alone, basing the loan at 25 years and a £860 arrangement fee, means you could save up to £10,320 is arrangement fees alone!
Cons of Fixed-Rate and Long-Term Mortgages
Don’t Believe All You’ve Heard – Could Still Pay More
One major downfall of having a fixed mortgage is in the fact that there is always a possibility that the interest rates may drop. Unfortunately if you happen to have a fixed rate you will be stuck paying the same rate. If the trend were to continue you would wind up paying more money than you would have if you had gone with the variable mortgage loan. Of course the likelihood of that occurring is reduced at the moment because interest rates are at a historic low.
Short-Term May Wind Up Being Cheaper Than Long-Term Fixed-Rates
There is a certain convenience with having the long-term and fixed-rate mortgage loan which is in the arrangement fee and only paying one. Unfortunately your long-term loan may cost more than if you have gone the shorter route. You could refinance every few years, pay the fee, and then wind up with the lower interest rate. This is a gamble for you of course.
Let me try and break down the numbers for you. Assume you took out a £120,000 mortgage. You were also able to secure a fixed-rate over the course of 25 years with the rate being 6%. Your arrangement fee is our £860 from earlier. The total for your loan per month (including 1 arrangement fee) would be a little over £788 using a repayment mortgage
Pretend for a moment that you decided to go with a variable loan instead. You have to remortgage every five years and doing so winds up averaging out to be 5% over that same 25 year length. With these numbers your average monthly mortgage would be £739. (including 5 arrangements fees)
Charges for Early Repayment
Unfortunately many of the mortgage deals that you find for fixed-rate repayment also have with them a penalty if you try to pay off early. They do this in order to make back some of the money they lost from the fixed income. In the end you could wind up not only paying too much for your loan but it may cost you more to pay it off faster.
Should You or Shouldn’t You Go With Long-Term and Fixed-Rate Mortgages
There is never any right or wrong answer to these tough financial decisions without knowing your individual situation. There is no single person on the planet that can begin to predict the future of the financial markets (despite the vast attempts to do so). When you get to the point of choosing your mortgage you hope to the heavens that the rate you are getting is the best you can get and that next week another one will not come to your door.
In all reality there is only thing to consider that is if you can pay the mortgage loan fee each month without neglecting your other obligations. If you can’t afford the loan then wait until a better deal comes along. Take a look at all of the past rates over the last year or two so you can have an idea on the trend of interest rates. If after all of this you are still not sure then consider consulting an independent expert.