Has a long loan left you in a fix?

OVER recent years, the Government has encouraged borrowers to opt for long-term fixed-rate mortgages in a bid to protect themselves against interest-rate fluctuations.

However, with rates on other deals plummeting, those on long-term fixes may now be considering switching to a cheaper deal.

“The Prime Minister has long been an advocate of 25-year deals and Chancellor Alistair Darling joined the chorus in 2007,” says Louise Cuming from price-comparison service Moneysupermarket.com. “But those who listened are now paying the price.”

Melanie Bien from broker Savills Private Finance agrees that fixing for a long time could prove to be an expensive option.

“In 1997, NatWest offered a 25-year fixed rate deal at 9.49 per cent,” she says.

“If you had opted for this, you would be kicking yourself now that interest rates have fallen to 1 per cent; fixed rates now start from as little as 3.49 per cent.”

Even those who took the long-term plunge two years ago will still be paying around 6 per cent interest a year for their mortgage.

While long-term fixes can offer the security of knowing what your monthly repayments will be for an extended period, there are downsides.

“Borrowers stuck on a 25-year-deal must now be thinking: ‘Do I stick with a mortgage at around 6 per cent while I see my savings rates also dwindle — or do I take the unsavoury step of paying an early redemption charge of at least 3 per cent of the value of my mortgage?’,” says Cuming.

Aside from the early-repayment charge, another disadvantage of a long-term fix is that you cannot benefit from a lower loan-to-value (LTV).

“With lenders offering preferential rates to those with lower LTVs, the downside with a 25-year fix is that, while your LTV declines as you pay off your mortgage and the value of your home increases, you won’t benefit from cheaper mortgage rates,” says Bien.

“This is worth considering because it could make a huge difference to the overall cost.”

So what should borrowers on a long-term fixed-rate mortgage do now?

“You need to ask a series of questions,” says David Hollingworth from broker London & Country.

“How much will it cost to get out? What new deal can I secure? What will this cost? What savings will I make over the remaining fixed-rate period? To make the move worthwhile, borrowers need to be able to cover the cost of switching deals — and then some.

“The longer you have remaining on the higher rate, the better your chances of being able to save money after early redemption penalty. Similarly, if you are paying a rate of around 5.5 per cent or 6 per cent, there is also the potential to make savings.”

The same applies if you took out a long-term fix 12 months ago when fixed rates went up significantly.

“If you took out a three-year fix then, and still have two years left to go, you could make savings by switching to a two-year fix,” says Hollingworth.

Mortgage experts recommend that borrowers who do decide to get out of a long-term fix should consider taking out another fix.

“If you have eight years remaining on your fixed deal, say, it may look as though you can make significant savings by switching to a tracker,” says Hollingworth.

“But rates have fallen very quickly and could shoot up again; if they do go up, you will soon see your savings eroded. The only way you can guarantee making savings is by switching to another fix.”

There are now plenty of two-year deals available at 4 per cent or less.

“HSBC has a two-year fix at 2.99 per cent with a £599 fee up to 60 per cent LTV,” says Hollingworth.

“For those who need a higher LTV, Clydesdale Bank has a two-year deal at 3.69 per cent with a £1,999 fee and an LTV of 75 per cent.”

Bien adds that slightly longer fixes are also looking good value at the moment.

“Royal Bank of Scotland, for example, has a five-year fix at 4.59 per cent with a £299 fee, available up to 75 per cent LTV,” she says.

“Anything under 5 per cent for five years is competitive and will protect the borrower from likely interest rate rises in a couple of years.”

Most people prefer the flexibility of fixing for a shorter period — two or five years, say — because they know what they will be doing in that time.

“This is not the case with 10 or 25 years, so check whether there is a break clause,” says Bien.

"Some lenders impose no early repayment charges after 10 years on their 25-year fixes, enabling you to switch to another deal without penalty.”

London & Country has an online calculator to help borrowers work out whether they can make savings by leaving a long-term fix, go to: www.lcplc.co.uk/calculators/early-repayment-charges.