Fixed-rate mortgages cost warning
Updated on 12 November 2007
Homeowners could end up thousands of pounds worse off if they opt for a long-term fixed-rate mortgage, a building society has warned.
Stroud & Swindon said someone with a £100,000 mortgage would be around £10,000 better off if they had opted for a series of two-year fixed rate deals during the past 10 years, rather than one 10-year loan.
It said someone who took out a 10-year fixed rate mortgage in 1997 would have paid interest at around 7.3%. As a result they said repayments on the loan would have totalled around £88,141 during the past 10 years.
But someone who had opted for a standard variable mortgage, which moves up and down with interest rates, would have paid only £80,341 in repayments, while someone who took out a series of two-year fixed rate deals would have paid even less at £77,904.
The group said opting for the series of shorter fixed-rate mortgages would have been more than £10,000 cheaper than going for a long-term deal, which more than outweighed the additional costs associated with remortgaging.
The Government is keen to encourage the take up of longer-term fixed rate loans as it argues it will help struggling first-time buyers budget with greater certainty.
But Paul Chafer, sales director at Stroud & Swindon, said: "Whilst it is obvious that something needs to be done in order to help first-time buyers get on the housing ladder, the current 10-year mortgage deals are not necessarily the right solution.
"First-time buyers are usually on a very tight budget so any saving they can make on their mortgage repayment helps. This research shows that long-term fixed rate mortgages are not always the most cost-effective option.
"First-time buyers will obviously be looking to move up the property ladder so will not want to be tied into a long-term mortgage."
But he added that, in certain interest rate climates, a 10-year fixed-rate loan could be the perfect answer for borrowers who have moved into a property that they intended to stay in for a significant period of time.
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