Fixed rate - the risk

Gorgeous_George

Hi

Many people will fix for 5 years (or less!) in 2008. Before doing so, they should consider what might happen when the fix ends.

If house prices have fallen over the period, they could be in negative equity and stuck on the lender's SVR. Unable to move and with a debt that is barely affordable, it will be a desperate situation.

If you are remortgaging, at least consider a 'life of mortgage' base rate tracker. Preferably one with little tie-in.

It's surprising how quickly 5 years pass.

GG

Chris2000

It's surprising how much the base rate can change in 5 years.

I remember the BoE base rate going from 10% to 12% to 15% in the early 90's. Fortunately the banks and building societies did not put up their Standard Variable Rate (or their savings rates) by the full amount. Tracker mortgages are relatively recent and they've not been properly tested in more difficult economic conditions.

I prefer the security of a long-term fixed rate, where the monthly payment is known to be affordable whatever happens to the economy. Five years is not long-term enough for everyone, but there are longer fixed deals available. Good advice to consider the tie-in conditions and not just the headline rate.

I would certainly ignore any mortgage adviser who tried to talk me into a short-term 2-year deal. I would automatically assume that they were more concerned about their repeat commission in 2 years' time than my long-term security.

Generali

Very good points IMO GG.

<OT>It's amazing how bearish you've become on property prices recently.</OT>

PasturesNew

Fixed rate mortgages are taken out by people who want stability. Ironically fixed-rate mortgages resetting will be a major contributor to the ride of 2008.

People are locked into them with large redemptions so they're caught between the devil and the deep blue sea on all fronts. Do you/can you sell in what is a falling market .... or, because of the redemption penalties should you/can you sit it out.

Followed by the in/ability to refinance back to back with the existing fixed rate if property values have dropped or the lender criteria have changed.

Gorgeous_George

Generali wrote: »

<OT>It's amazing how bearish you've become on property prices recently.</OT>

It is difficult to ignore the blindingly obvious

I still think that the North East will suffer somewhat less than many areas.



GG

m00m00

the other options to consider with longer term fixed rates, are whether or not the mortgage is 'portable' and what the early redemption clauses are.

as much as people might want stability when taking out long term fixes, things do change when we least expect them to.

wymondham

what happend to the idea of fixed mortgage rate for life products? - sure i heard they were being considered - this should help with this sort of problem.

Strapped

There are a couple of 15yr and even 25yr fixed-rate products out there.

jonewer

wymondham wrote: »

what happend to the idea of fixed mortgage rate for life products? - sure i heard they were being considered - this should help with this sort of problem.

Nu Labour spin. These are already common place. You can get these and they have been available for years.

Just the good old scottish mafia trying to make it seem like they are doing something.

MarkyMarkD

PasturesNew wrote: »

Fixed rate mortgages are taken out by people who want stability. Ironically fixed-rate mortgages resetting will be a major contributor to the ride of 2008.

People are locked into them with large redemptions so they're caught between the devil and the deep blue sea on all fronts. Do you/can you sell in what is a falling market .... or, because of the redemption penalties should you/can you sit it out.

Followed by the in/ability to refinance back to back with the existing fixed rate if property values have dropped or the lender criteria have changed.

I don't really understand your point, or agree.

Only a very small minority of fixed rates maturing in 2007 or 2008 have extended ties.

Most people are therefore free to remortgage, or switch products with their existing lender, or sell up and redeem their mortgage without penaltywhen their fixed rate ends.

If you are switching product with the same lender, changing underwriting criteria are irrelevant - product switches are not underwritten.

MarkyMarkD

jonewer wrote: »

Nu Labour spin. These are already common place. You can get these and they have been available for years.

Just the good old scottish mafia trying to make it seem like they are doing something.

Indeed. They have always existed but nobody wants them. Just because Labour pretended it was the lenders' fault for not offering them didn't change that underlying fact.

People are not prepared to pay redemption penalties over a 25 year fixed rate term. Lenders cannot afford to offer fixed rates over a 25 year term without redemption penalties.

The only way that the government could increase the popularity of long-term fixes would be to force the lenders to offer them without penalties, and the only "fair" way to do that would be for the government to accept the early settlement risk. Somehow I can't see them taking on that open-ended exposure.