Charcol warns consumers off long-term fixes

John Charcol has urged consumers to consider whether now is the right time to lock into a long term fix.

The warning follows Nationwide launching a 25-year fixed product with no early repayment charges after the first 10 years.

Ray Boulger, senior technical manager at John Charcol, says: “Nationwide’s decision to launch a 25-year fixed rate provides a welcome addition to the choices available for borrowers looking for long term security.

“However, 25-year swap rates have increased by around 0.4% over the last four months and the cost of funds now fully reflects the expectation of one further increase of 0.25% in base rate to 5.5%.

“After the eight to one vote for no change, with one vote for a cut, at the March meeting of the Monetary Policy Committee it looks increasingly likely that rates are close to their peak for this interest rate cycle.

“Therefore borrowers looking for long term security need to consider carefully whether now is the right time to lock into a long term fix.

“For example, as recently as January of this year Kent Reliance were offering a 25-year fixed rate at 4.98%.

“Long term fixed rates are ideally suited to borrowers who intend to live in their property for the long term, and prefer the security of a constant monthly mortgage payment to help with budgeting.

“This Nationwide mortgage addresses one of the main reasons why most people don’t buy long term deals, i.e. the early repayment charge.

“It does this by only imposing this charge for the first 10 years. Thus another way to look at this mortgage is as a 10-year fixed rate with an option to continue at the same rate with no early repayment charge for up to another 15 years without incurring any further costs.

“The fact that this mortgage is flexible is also important as the longer the term of the deal the more important it is to have some flexibility.

“However, it is disappointing that Nationwide still limits ERC free overpayments to £500 per month during the ERC period, compared to the much more common 10% offered by many lenders.

“Whilst £500 per month will be adequate initially for most borrowers who want to make regular overpayments, in time as their income increases this may be too restrictive.

“It also means the mortgage is not suitable for those borrowers who want to make substantial annual overpayments from, for example, a bonus.

“Customers looking to borrow up to 75% loan to value will find cheaper deals from Kent Reliance (5.15%) and Manchester (5.39%), but although both of these deals allow the same ERC free overpayments as Nationwide neither of them are flexible.

“Borrowers wanting maximum flexibility should consider Northern Rock’s 15-year fixed rate at 5.39% to April 30 2022 (maximum LTV: 85%), which allows unlimited ERC free part repayments as well offering all the flexible features.

“Another option to consider is a 10-year fixed rate from Derbyshire, 4.95% to March 31 2017.

“The rate on this deal, which has a maximum LTV of 80%, is over 0.5% cheaper than Nationwide’s lowest rate but it doesn’t offer the option to continue on the same rate for up to another 15 years.

“Thus the trade off is to either save about 10% in interest payments over the 10 years and then choose the best deal available at that end of that period or to pay a higher rate to Nationwide with the guarantee of the option to continue at the same rate for up to another 15 years.

“It is anyone’s guess as to where interest rates will be in 10 year’s time.

“Where the Nationwide offer looks most attractive is for purchasers wanting between 75% and 90% LTV, where it offers a rate of 5.49% and other lenders are less competitive.

“For remortgages and existing customers wanting a product switch the rate is 0.1% higher at 4.59%.

“This deal looks expensive for purchasers wanting between 90.01% and 95% as they will be charged 0.3% more with a rate of 4.79%.

“This means that anyone borrowing over 90% LTV and keeping this mortgage for the full 25 years will pay a whopping 7.5% extra over the term.

“Nationwide is quite rightly critical of lenders who still impose a higher lending charge but a typical HLC equates to about 1.5% of the mortgage amount on a 95% mortgage, just a fifth of the extra interest Nationwide would charge a 95% borrower over the full term of this mortgage!

“If Nationwide feels that a 0.3% premium is appropriate for a 95% mortgage, and this is broadly in line with the market, it should limit the time this premium is charged to the first five years to avoid charging more than the cost of a typical HLC.”