Why you should choose a long-term fixed mortgage deal today!

Long-term fixed rate mortgages are pretty cheap right now, but are they a good choice for borrowers?

Last week I explained why it's a good idea to grab a fixed rate mortgage while they're cheap. After months and months of economic turmoil, it looks like fixed-rate mortgages may not get any cheaper.

But how long should you fix your rate for? Should you go for a deal that could last as long as ten years?

Well, the cheap rates we're seeing today won't last forever. And since we've probably already reached the bottom of the interest rate cycle, going for a long-term fixed rate now makes sense. That way you can take advantage of relatively low mortgage repayments for many years to come.

But taking on a mortgage deal for say, the next ten years - or even longer - is a serious commitment. The trouble is long-term fixes come with early repayment charges (ERCs), which normally last throughout the fixed rate period.

So, that means if you fix for ten years, you're normally tied in for ten years. Change your mind before that time is up and you could be hit with a heavy penalty.

Of course, it's difficult to predict how your financial future might shape up over the next decade. After all, the unexpected can - and does - happen. But if that doesn't worry you unduly, long-term fixed rates have some serious advantages - especially today.

Why choose a long-term fixed rate?

By choosing a long-term fixed rate, your mortgage repayments could be guaranteed for the next decade or longer. You would normally expect to pay a higher rate in return for this certainty. But how much more expensive are they when you compare them with short-term fixed rates?

Well, the best buy two-year fixes come in at below 3%. But today, the lowest rate long-term fixes are priced around 5% as you can see in the tables below:

Top long-term fixes at 60% LTV

For borrowers with a deposit or equity in their home of at least 40%

Source: Moneyfacts

Top long-term fixes at 75% LTV

For borrowers with a deposit or equity in their home of at least 25%

Source: Moneyfacts

True, you might have to pay a higher rate for a long-term fix than you would for a deal that lasts two or three years, but the rates shown here are still pretty low historically.

You'll notice there isn't a table showing ten year deals at 90% LTV. If you only have a deposit or equity in your home of 10% or less, I'm afraid long-term fixed rates are out of the question because there aren't any lenders willing to lend on these terms at the moment.

Already mortgage industry experts claim lenders are poised to step up fixed rates because funding for this type of mortgage is expected to become more costly in the coming months. So, there's a risk that by locking into a short-term fix now, you could be hit with much higher rates when you come to remortgage in two year or three years' time.

Of course, it's even more difficult to predict where interest rates might be in ten years' time. Or how they will move over the whole ten years. The next ten years might be a period of low inflation with low interest rates. So you might sign up for a ten-year deal at 5.19% and find that the average variable mortage rate over the whole period could be as low as 3%. On the other hand, inflation (and interest rates) might soar over the period. Then 5.19% would look like a great rate in hindsight.

What's more, if interest rates are high in ten years' time you could face payment shock at the end of your mortgage deal. However, I reckon that payment shock is a greater concern if you choose a short-term fix. That's because I believe that the only way is up for interest rates and that will mean that mortgages will almost certainly get more expensive in the short-term.

Cheaper fees

So, locking into a historically low rate now has to be the best reason for choosing a long-term fix. But there's also another major cost advantage because you won't need to remortgage regularly. 

Remortgaging isn't cheap and every time you apply for a new special rate deal, you'll almost certainly have to shell out for new product fees, valuation fees and so on. But by fixing for the long-term you could save thousands.

What about five year fixes?

If you're still not convinced by long-term fixes, you could go for a half-way house with a medium term five-year fixed rate instead. If you have a deposit or equity in your home of at least 40%, one of the most competitive deals around is from Britannia Building Society with an even lower rate of just 4.24%*.

And, if you're still unsure what to do, don't forget you can get advice on the best deal for you from our lovemoney.com mortgage brokers.

*This deal has a product fee of £999

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