There are some common misconceptions when it comes to long-term fixed rate mortgages. From the much higher interest rates to the flexibility of these products, it can be all too easy to think that a long-term solution is an expensive solution, but that isn’t necessarily the case.
At Perenna, we believe it’s time to set the record straight on long-term fixed rate products and demonstrate why these mortgages could offer greater value and flexibility than consumers might have believed. .
Myth #1 – Long term fixes are expensive compared to short term options
Short-term fixed rate mortgages may offer a cheaper overall rate, but borrowers could face high product fees when they have to remortgage every two, three or five years.
Typical product charges are £999 to £1,500 – over a 30 year mortgage term borrowers could pay nearly £22,500 when consistently opting for a two year short term product . With a long term fixed rate mortgage of 30 years or more, these costs are significantly reduced because consumers will not need to remortgage as often.
Myth #2 – Borrowers spend a lot more on interest on a long-term mortgage
Data from the Financial Conduct Authority previously revealed that more than two million borrowers benefited from their lender’s Standard Variable Rate (SVR). These borrowers end up spending thousands of pounds more on interest than they should. For example, a 2% increase for three months is a cost of £1,250 on a mortgage of £250,000, if you have that 15 times over a term, there’s still £18,000 (all of that adds more than 0.5% at your actual rate terms).
By switching to a long-term fixed rate mortgage, consumers will have fixed monthly payments for the long term and not have to worry about switching to an SVR.
Long-term solutions don’t always have to mean higher interest rates either. In established long-term mortgage markets like Denmark, the rates for these products are comparable. This is because these mortgages operate on a different model by linking to the long-term bond market.
Myth #3 – The low interest rate environment favors short-term borrowers
Rising inflation and costs are pushing the Bank of England to raise the base rate, which could lead to higher mortgage rates. Most borrowers in the UK have mortgages that offer little protection against these rises, as those committing to shorter-term products may soon find themselves facing much higher rates on a new mortgage. .
Each additional percent of interest when refinancing over a 30-year term amounts to £5,000 over a two-year period or £12,500 over a five-year period. With long-term fixed rate mortgages, borrowers can secure low rates and have regular monthly payments that won’t keep up with rising rates.
Myth #4 – Long-term fixes aren’t flexible
The traditional long-term fixed rate mortgages currently available in the UK can come with costly and time-consuming exit charges, but that may soon change. Lifetime flexible fixed mortgages will give homeowners the same freedoms as a shorter term mortgage. With Perenna, consumers will be able to remortgage with no exit fees after just five years.
So if rates drop even further or someone’s circumstances change, they can change without incurring onerous fees.
Myth #5 – There are already a lot of choices in the mortgage market
From high loans to high values to housing schemes, there are already hundreds of mortgage options to choose from, but we believe the choice available to borrowers is still limited by the short-term nature of the UK mortgage market.
For many borrowers, the choice of long-term solutions remains far too limited. The solution, which has proven successful in other markets such as the United States, Germany and Denmark, is flexible and fixed lifetime mortgages.