The more we look at fixed long-term mortgages the more we like them, especially as they've been getting cheaper. This trend will likely continue in 2006 as competition in the mortgage sector in general hots up. Mortgage consumers should therefore keep a close eye on the market this year.
What Is a Fixed Rate Mortgage
- The interest rate paid on a mortgage is usually determined by the official bank of England interest rate
- But with a fixed rate mortgage the interest rate is fixed
- Fixed rate mortgages are very common in the UK but most consumers tend to fix them for only a few years
- A fixed-rate mortgage is exactly what its name suggests, the interest rate is fixed for a set period of time
- Fixed rate mortgages are therefore the best way to finance the home if interest rates are rising, conversely if interest rates fall then the owner of a fixed-rate mortgage will not see his monthly repayments drop.
This article looks at longer-term fixed mortgages (5-10 years) because they make a lot of sense especially as so many homeowners are mortgaged up to the gills.
Long Term Fixed Mortgages Are Not about Making Money – They're About Reducing Risk
One of the biggest problems that people with high mortgages face is effective budgeting. For example, you may have a large mortgage with the monthly repayments easily covered by your income. But what happens if interest rates move considerably higher over the next five years? Would you then be able to cope, or would the majority of your pay packet now have to be allocated to the monthly mortgage payment?
If interest rates were to rise considerably then the housing market would likely suffer a serious downturn as many people would be trying to sell in order to reduce their monthly mortgage payments. It is therefore a vicious circle.
Far too many homeowners view their property as a cash cow rather than a place to live. All they tend to think about is low interest rates and higher property prices, thinking the boom will go on forever. Looking at the downside is something that does not concern those same people or if it does it's something to worry about 'tomorrow'.
But focusing on the downside is just what long-term fixed mortgages are all about. Wouldn't it be nice to know that they monthly payment that you make on your mortgage will always stay the same whatever happens to the economy or interest rates. If you think so, check out just what's on offer from a mortgage broker (see links below).
Good News – Long Term Fixed Mortgages Are Coming Down In Price
- One of the problems that has put consumers off long term fixed mortgages is the interest rate quoted
- Interest rates have been on average 0.5-1% above fixed two-year deals, but this is all going to change in 2006
- An example is the Leeds Building Society offering a 10 year fix at 4.69% versus a best buy 2 year fix at around 4%
- Note, that with longer term deals there are often hefty early-redemption penalties but these should not worry people too much especially if they really want the advantages of being able to perfectly budget (mortgage payments) for many years hence
Summary
As we've said earlier, long term fixed rate mortgages are not about penny-pinching, always trying to get the cheapest deal available. No, they're about thinking into the future an accepting a higher rate of interest but with the added insurance that if things go bad in the economy and interest rates rise considerably the fixed rate deal will work out well and give you piece of mind.
One final point, market professionals are suggesting that interest rates will likely be cut by up to 0.75% over 2006 so the best time to get a long term fixed deal is perhaps in the second half of the year. But remember the banks are not stupid so if they see rates starting to rise all fixed term deals will also rise in cost.
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