Should you fix your mortgage rate for 25 years?

Fixed-rate mortgages are now the most popular type of mortgage with the majority of us fixing for two, three or sometimes five years. But how do you feel about taking out a fixed-rate mortgage for 25 years? This is what the government would like to see more of us doing. It believes that this would help stabilise the mortgage market because it would protect borrowers from jumps in interest rates.

In response to this, lenders such as Halifax, Nationwide and Kent Reliance Building Society have already brought out 25-year fixed-rate mortgages.

Find the best buy fixed rate mortgages

Long-term mortgages haven't been popular in the past because the interest rate tends to be higher than on short-term fixes. As at the time of writing, you could get two-year fixed rate mortgages at 5.37% from Newcastle Building Society, three-year fixed rate mortgages at 5.75% from the Cheshire and a five-year fixed at 5.88% from Giraffe, whereas 25-year mortgages are mostly above 6%.

However, Kent Reliance offers one of the cheapest rates on its 25-year fixed rate mortgage of 5.98%. Halifax charges 6.39% on its 25-year fixed mortgage and it has an arrangement fee of £599. This is slightly higher than its 10-year fixed rate which costs 6.29%.

You may also make overpayments of up to 10% of the outstanding balance a year without paying a penalty charge, underpay and take payment holidays.

What happens to your mortgage if interest rates fall?

Long-term mortgages are fine if you take one out when interest rates are at their lowest. The scary thing about them is what happens if interest rates fall dramatically and you're stuck with a high interest rate for years and years?

Looking back, if you had taken out a 25-year fixed-rate mortgage in 1982, when the Bank of England's base rate was 14%, 10 years on you wouldn't be very happy because this is when interest rates started to fall by more than half.

Moneyextra's mortgage calculators can help you work out what you can afford.

If interest rates did fall, you wouldn't actually be stuck with a higher rate because these new long-term fixed rate mortgages are quite flexible and there is an escape route. But it will cost you. Both Nationwide and Halifax charge a 3% fee on the outstanding balance should you wish to redeem your mortgage within the first ten years.

Cheap interest rates aren't so cheap

While it would be comforting to have a mortgage safety net, let's face it, we are a nation of rate tarts. We have got used to switching every few years to get the best mortgage deal around and the concept of 25 years fixed debt seems too much of a radical change for many of us.

But when you switch your mortgage every few years, you have to remember that there is a reservation charge and an arrangement fee to be paid every time you take out a new fix. With the Newcastles two-year product, the arrangement fee is £1,599! If you are switching to a new lender, there are also valuation and legal fees.

14 August 2007 © Moneyextra.com

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