It was reported last week that a huge number of UK home owners are facing problems due to the fact that their cheap fixed rate mortgage deal was about to end and that they were unable either to afford the revised monthly loan repayments, or to be able to find a suitably cheap loan to replace their existing mortgage.
This mostly applies to those borrowers who took out a two or three year fixed rate mortgage at low rates, without thinking about the consequences of what would happen when the deal ended. Most people assumed that they would simply be able to remortgage to a new, equally cheap loan, a belief fuelled by a large number of lenders and mortgage brokers who “coincidentally” receive a commission from the lender every time their client re-mortgages!
New research from the Abbey has now shown that borrowers, thankfully, are waking up to the fact that short term fixed rate loan and mortgage deals are not actually as good as they initially thought they were, particularly in view of the current economic climate and more borrowers are opting for much longer term deals in order to try and get beyond the credit crunch. Of those surveyed, 27 per cent said that they would prefer the option of a five year fixed rate and a further 11 per cent said they would go for a fixed rate term of ten or even fifteen years.
Although a fixed rate mortgage provides the security of knowing how much you will be paying on your loan, they do tend to be quite expensive, particularly at the moment and whilst they are great if interest rates increase, over a longer term if rates drop, a borrower could find themselves paying over the odds for their loan with the prospect of a large redemption penalty if they try to move their deal.
Perhaps a better option would be to borrow a sensible amount that you can actually afford and then take out a flexible tracker mortgage for the lifetime of the loan, which would be affordable now, but would also remain affordable in ten, fifteen or twenty years time, with flexible payments in the meantime and no penalties…just a thought!
