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16 Sunday Dec 2012

Can you fix your mortgage for too long? Posted by:

All we’ve heard recently is how cheap five-year fixed-rate mortgages have become – as long as you have a 40 per cent deposit or similar level of equity in your home. However, HSBC announced today that just one month after launching what was at the time a market-leading rate of 2.99 per cent, it is pulling it due to overwhelming demand. (RBS still has the market-leading five-year fix – at 2.95 per cent – but don’t expect it to be around for long).

Yet while HSBC is pulling its fix, Manchester Building Society (MBS) is launching a range of mortgages with much longer fixed-rate periods. It is offering borrowers a fixed rate of 5.24 per cent for anything between 10 and 25 years (there is an arrangement fee of ¬£995 and it’s available up to 80 per cent loan-to-value, for those who are interested). There are early repayment charges but only for the first seven years after which time you can maintain the rate or review it.

But even though you are effectively fixing for seven years, borrowers still need to be cautious. MBS says you can port its fixes, which incidentally are also available on buy-to-let properties. And yet, porting is never guaranteed. The lender will have to approve your next property purchase and the LTV must be acceptable too. There is a chance that you won’t be able to port – and that means paying a substantial early repayment charge.

Can you honestly say you know where you will be in 25 years time? I’m not sure anyone could and there will always be some uncertainty. Subsequently, few borrowers will feel comfortable fixing their mortgage for this length of time, even if there is a get-out clause after seven years.

It is clear why borrowers feel happier fixing for shorter periods. A two-year fix is the cheapest and most flexible option as most people are happy to commit for such a short period of time. But it’s not¬†necessarily the most sensible idea as it looks unlikely that interest rates will rise during the next couple of years. Five years seems a happy compromise, particularly with some cracking deals available, although you will need a sizeable deposit to qualify. Those with more modest deposits will pay a premium.

But what if you don’t want to fix? Base-rate trackers are cheaper initially and if interest rates stay at 0.5 per cent for several years, you’ll be pleased you opted for one. If you are looking at trackers, it’s worth choosing one with no early repayment charges at all, or after the first couple of years, so that you can switch to a fix when interest rates start to rise.

The key is to seek independent mortgage advice from a whole-of-market broker who will help you establish which mortgage is the right one for you.