Homeowners have become used to remortgaging every couple of years. Short-term, two and three-year products have been popular because they offered the best value. However, soaring arrangement fees and higher rates mean that serial remortgaging may no longer be the best option.
In recent years, the rates on two and three-year mortgage deals have tended to be about one percentage point lower than those on longer-term products so they have been the obvious choice for borrowers wanting to keep their monthly costs down. However, the landscape has changed considerably over the past few months.
How the market has changed
Competition in the market forced the rates on short-term deals down as lenders battled for business and the best rates were often lower than the institution's borrowing costs. But as a result of the credit crunch, banks and building societies are now taking a more cautious approach.
Not only has the liquidity squeeze increased the cost of wholesale funding, lenders are also looking to widen their margins and give themselves more protection. Consequently, the difference in rate between long and short-term mortgage deals has narrowed considerably. First Direct has the lowest two-year fixed rate at 4.95%, while Derbyshire building society is offering a two-year fix at 4.99%. However, you can fix for five or 10 years at 5.29%.
While the short-term rates are still slightly lower, rising upfront fees have increased the costs of setting up a mortgage. The average arrangement fee has jumped from around £450 in 2005, to about £1,000 now - the impact of having to pay such an amount every time you remortgage significantly eats into the financial benefits.
Why long-term deals may be a better solution
The arrangement cost on First Direct's two-year fix is £1,498, yet it is charging a set-up fee of just £598 on its market-leading five-year fix at 5.29%.
An increasing number of borrowers are therefore deciding that longer-term products are a better option.
Ten-year fixes are also looking good value at the moment. Woolwich has the lowest rate at 5.29%, with a £995 arrangement fee. However, this is only available on loans up to 60% of the property's value. If your deposit is less than 40%, Derbyshire has the best 10-year deal at 5.48%. The minimum deposit required for this product is 10% and there is a £999 arrangement fee.
If you never want to worry about having to remortgage, you can fix for 25 years with Kent Reliance at 5.50%. The arrangement fee is £995 and the product is available for loans up to 75% of the property's value.
The pitfalls of long-term mortgages
The Government is keen for more borrowers to take out long-term fixed rate mortgages as it believes they will help alleviate volatility in the housing market. Borrowers with fixed rates are also unaffected by interest rate changes.
However, despite the fact 10-year-plus fixed rates are attractively priced at the moment, the majority of people are reluctant to lock in for such a long period in case their circumstances change, because most of these deals carry hefty penalties if you redeem the loan within the fixed-rate term. Five years seems to be the maximum amount of time many borrowers feel comfortable fixing their mortgage payments for.
Another option worth considering, if you do not want to keep remortgaging is a lifetime tracker. Trackers do not offer the protection against rising interest rates that a fixed rate product gives, as they move in line with Bank rate, but most of the lifetime deals do not carry an early repayment charge. You therefore have the peace of mind that you will never have to remortgage unless you want to, but if interest rates suddenly start to rise significantly, you have the flexibility of being able to switch into a fixed rate at any time.
First Direct and Melton Mowbray building society are offering the best lifetime trackers. Both have a rate of 5.74% although First Direct's fee is lower at £399, compared with £999 for Melton Mowbray. If you are looking to borrow more than £200,000, you can get a more competitive rate of 5.59% from First Direct.
If you are unsure about what sort of mortgage to go for, call one of our advisers for tailored advice on 0845 345 5705.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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