Oith the value of the pound sterling a fraction of what it was three years ago, the threat of post-Brexit food shortages and the prospect of a looming recession, British households could be forgiven for seeking some calm and consistency in their finances.
For many, this may take 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 the event of future turbulence.
A number of 15-year fixed interest rate mortgages have come onto the market offering exactly this security, meaning homeowners will know exactly what their outgoings will be by 2034. But although they offer the security of a fixed monthly bill, if you register?
The new offers
Virgin Money announced in late July that it was offering a 15-year solution, the first time such a loan had hit the market since 2009, in the midst of the financial crisis. Its offer gives rates between 2.55% and 3.75% depending on the value of the loan compared to the value of the house.
The Yorkshire building society then followed that up with a 15-year solution offering 2.79% to 3.65% depending on the loan-to-value ratio.
Commentators suggest a variety of reasons for the arrival of new mortgages, with some saying they provide security to a market of homeowners who want to isolate themselves in tough economic times.
Others say lenders are simply testing new products at a time when economic uncertainty has driven down long-term interest rates.
“As the gap between the cost of funds for lenders borrowing over shorter tenors and 15 years has narrowed, it has become possible to offer a 15-year solution at a rate sufficiently close to the rates over five and 10 years for lenders to believe in it will be a demand,” says Ray Boulger of mortgage broker John Charcol.
Although it is expected that there will be more similar loans in the future, the offers could also be withdrawn without notice, adds Rachel Springall of the financial website Moneyfacts.co.uk.
But are they for me?
For many, the benefit of a fixed-term contract will be knowing exactly how much they will pay each month for the next 15 years, which will keep things consistent as the economy fluctuates. However, only at the end of the term will borrowers be able to look back and assess whether it was a good idea.
“Longer-term fixed rates carry higher interest rates than their short-term counterparts, so there is a cost to long-term stability. That price may be worth paying, of course, if rates rise in the future, but will inevitably force borrowers to consider whether they are going for a lower rate now and revisit it in the future,” says David Hollingworth of London and Country Mortgages.
They are best suited to people who are in their “forever home” and have no intention of leaving and want to protect themselves from risk, says Chris Sykes of Private Finance Mortgage Consultants. However, those who want to move may encounter problems.
“While the majority of transactions are transferable – so they can be taken to new ownership – there is no guarantee that the borrower will always meet the lender’s criteria, or what rates would be available on any additional borrowing that may be required,” says Hollingworth.
Is there a sting in the tail?
Once you’re there, it can be expensive to get out. Commentators were quick to point out that prepayment charges (ERCs) – fees for repaying the loan too soon – can be very high.
“A lot can happen in 15 years. Most borrowers are happier to fix 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 patches are very popular and seem good value for money compared to two-year ones. Some borrowers look at 10 years, but 15 years goes even further.
“Virgin’s 15-year fix also has high ERCs (8%) until January 1, 2025. On a £400,000 mortgage, that works out to £32,000, which is a lot of money.”
In the case of a separating couple, it could come at a substantial cost at a difficult and emotional time. “Even someone who expects to stay in their property may need to move for completely unforeseeable reasons, which is why ERCs are important; for example, a significant minority of couples will separate within 15 years and may have to sell,” says Boulger.
What’s next – a 20-year fix?
20-year fixed rate mortgages are a feature of some European countries and Hollingworth says there have been 25-year terms in the past.
But if those longer terms come into play, so do more consumer-friendly terms, says Boulger. “Now is the perfect time for lenders to consider offering a 20-year solution, or even better 25 or 30 years. I expect to see terms longer than 15 years offered by next year, but the longer the term, the more important it will be for ERCs to be consumer-friendly,” he says.
So do you need to register?
A long-term fixed mortgage is clearly not for everyone and may be more appealing to those seeking financial security, having found the home they will spend the rest of their lives in. But while today’s low interest rates allow banks to offer such offers, they should also be used by consumers to settle their commitments early.
Springall says: “Wherever possible, borrowers would be wise to take advantage of low rates and try to overpay to accumulate more equity and reduce the term of their mortgage. This can push borrowers into a lower bracket of the loan-to-value ratio and allow them to find a cheaper mortgage that can lower their monthly repayments when they refinance.