A long-term fix for your home loan

Longer-term fixed-rate mortgages may suit some GPs, says Liz Willis.

The pace at which the Bank of England base rate has increased during the past 18 months can make mortgage payments a challenge.

When the base rate rises, so do mortgage providers' interest rates. Because they often take a flexible attitude to the loan-to-income ratios for medical professionals, a lot of GPs tend to have large mortgages.

Mortgage debts of £400,000-£600,000 are not unusual, and some banks will lend six times annual earnings. The snag with a big mortgage is that even a small move in interest rates can make it tricky to afford the monthly payments.

Whether you have an £800,000 mortgage with high monthly payments or your adult child is struggling with higher interest on a £150,000 mortgage on a much lower income, the hardship factor can feel the same.

Chancellor Alistair Darling recently announced that the Treasury would reorganise the mortgage market to increase the supply of long-term fixed rates. He has concerns about the high cost of regular remortgaging to find a cheaper deal and the impact of this on first-time buyers.

Lenders have responded by launching new fixed-rate deals and there are now more 10-year, 15-year and 25-year fixed rates around.

But before you make a hasty decision to switch to a fixed rate, consider if this really is the best step for you. For example, one deterrent to fixing is facing large penalty charges for early repayment. See the box, below, for the pros and cons.

Although Mr Darling is considering different ways to make long-term fixed rates more attractive, a major concern for most of us is that we do not know what the future holds. Apart from financial considerations, issues such as divorce, deciding to live abroad, a relative dying or ill health can play havoc with forward planning.

Long-term fixed rates

Long-term fixed rates are not about penny-pinching, because they are often set at higher rates than for shorter terms. Fixing is about effective budgeting.

But stability of monthly outgoings is one thing and being stuck with a fixed-rate year for a quarter of a century is quite another, especially if interest rates in general fall substantially.

Compromising with a shorter fix is more attractive and some lenders might now have the right solution for you - a 10-year fixed rate with an option to renew for a further 15 years without an early-repayment penalty if you do not take up the option.

For young GPs a 25-year fixed-rate mortgage at the start of your career may sound great. Make sure you read the conditions carefully. Even though you might be able to move your mortgage to a bigger property in years to come, the criteria might have changed regarding 'top up' borrowing.

If you have recently become self-employed, you might find that the same lender might not want to lend you more, or will do so only at a higher rate.

Liz Willis is from the Medical Profession Advisory Division, St James's Place Partnership. For more information phone 07900 654401 or visit www.sjpp.co.uk/lizwillis.

To fix or not to fix

Advantages

  • A long-term rate gives you the ability to budget and protect yourself against future rate increases.
  • You have the security of guaranteed mortgage payments.
  • The longer the mortgage term chosen at outset, the better the value, as you do not have future re-mortgage costs to take into consideration.
  • Fixed-rate mortgages are often portable, enabling you to move house.

Disadvantages

  • If interest rates fall during your fixed period, you can be tied into a higher rate for a long time. If you had a mortgage in 1992, you might remember rates at 15 per cent. These make today's fixed rates seem highly attractive. However a couple of years ago, the rates were 1 to 2 per cent lower.
  • You can face very high early-repayment charges to get out of the deal.
  • Even though the mortgage may be portable, if you need a 'top up', it might not be at a competitive rate.

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