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Be careful with fixing your mortgage for a long period – particularly if you think you might move

Be careful with fixing your mortgage for a long period – particularly if you think you might move

It’s become almost default common sense to take out a five-year fixed rate mortgage these days. 

The rates are almost as low as two-year fixes: the average two-year deal has fallen 0.03 percentage points from January to 2.49 per cent this month, while the average five-year has dropped 0.09 percentage points to 2.85 per cent over the same period, data from Moneyfacts shows.

And the received wisdom is that rates are bound to start going up soon, and financial experts like to stress the value of knowing that your payments will remain the same well into the future.

(Which is fine of course if they could have been higher; but not so great if they could have been lower.)

Direct mortgage applications with banks and building societies have become tricky affairs.

Direct mortgage applications with banks and building societies have become tricky affairs.

Direct mortgage applications with banks and building societies have become tricky affairs.

Indeed there’s a vogue for fixing for longer, like seven or even ten years. But there are catches to all this, as our own Will Kirkman explained the other day: early repayment charges and a lack of flexibility if you need to move and borrow more money.

That and also the fact that the borrowers who’ve done by far the best in the ten years since the Bank of England cut the base rate to 0.5 per cent are those who stuck with tracker mortgages that charge a certain (small) amount over the Bank Rate. Or flipped from one very low two-year fixed rate to another.

I took out my first mortgage at the end of 2013: I fixed for five years at 2.7 per cent, which was a very competitive rate at the time – but actually mortgage rates came down quite significantly in the subsequent years and it became not exactly a bad deal but certainly far from the best.

When that loan expired last year, my thinking was, ‘Right OK, with hindsight of course I’d’ve got a two-year fix or a tracker five years ago. But now after five MORE years of rock-bottom rates, surely the chances are that the BoE will move soon, so the best option is to fix again for five years.’

Which I duly did and got one at 1.55 per cent – which was, and may remain, a very good deal, though obviously it came with a big fee.

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But stupidly I misunderstood the notion of ‘porting’. Because I knew we would almost certainly want to upsize in that period, I checked that the mortgage was portable, and thought: ‘Well that’s fine, five-year fixes can’t go much lower than 1.55 per cent so we’ve got a nice cheap loan for X amount of borrowing, and then we can shop around and get another cheap loan for the extra borrowing we’ll need.’

Except you can’t shop around. That extra borrowing has to come from the lender that you have the first loan with – not something I’d fully appreciated.

Now this is fine if you are a straightforward case. 

But I am old enough that a 25-year loan will take me into retirement age, and some lenders are a lot more relaxed about that than others. 

This is where a mortgage broker proves invaluable – and that is what I had envisaged, that we’d get a broker to find us the best loan for the extra borrowing.

Particularly because direct mortgage applications with banks and building societies have become fairly harrowing affairs, conducted increasingly over the phone, with full-on interrogations and interminable repeat questions. 

(There seem to be ‘correct’ answers to certain questions that they put to you again and again until you ‘get it’ – like a game of charades.) 

Having done two in five years I was looking forward to handing the next one over to a broker.

But the early repayment charges make it too expensive to fully remortgage in any but the last year or two – and even then it’s a fair bit, particularly if you’re already faced with a massive stamp duty bill.

So, if we do want to move and borrow more in the next four years, I’m going to have to go cap in hand to my building society and see if they’ll give us a decent rate and maybe take the term a year or two past state retirement age – which if the song and dance they made about it during the last application is anything to go by, will be about as straightforward and enjoyable as Theresa May’s Brexit negotiations. 

One alternative would be to take out a second-charge mortgage – but that would be more expensive too.

It might turn out fine, it might not – but we’ll certainly be paying more than if we could have gone to a broker for the full loan.

Many households, especially in and around the capital, find that the only way up the property ladder is to try and buy in an area on the up, add a little value to the propety, and upsize. 

The increasing penalty of stamp duty means that this is harder than it was and people are not moving as frequently as they used to.

A long fix could in many cases be an excellent idea – but it could also be another cost that makes buying a larger home more difficult.

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