DETROIT: Toyota Motor Company said Tuesday that it was testing hybrid vehicles with rechargeable batteries in the United States and Japan, setting up a direct challenge with General Motors to develop the industrys first plug-in hybrids. Toyotas announcement is its first formal confirmation that it is ready to test plug-in hybrid vehicles, which environmentalists say may prove to be cleaner and more fuel-efficient than current hybrids. In recent months, Toyota executives have said the company...
Mortgage Clinic: ‘Does it make sense to get a 25-year fixed rate?’
July 25th, 2007
Q. The Prime Minister suggested that more people should fix their mortgages for longer. A fixed-rate mortgage does seem to make sense, given that a lot of people expect interest rates to rise further in coming months. But is it really better to opt for a long-term fixed rate now, or should I go for a two-year deal? AC, by email
A. Long-term, fixed-rate mortgages are not a new idea. Standard Life Bank launched a 25-year fixed-rate several years ago, and some banks and building societies have offered them since.
But they’ve not been popular. One reason is that 25 years is a very long time in any financial commitment. On average, we move house every seven years, without allowing for other changes in circumstances such as unemployment or divorce.
Then there’s the question of picking the right loan. It is hard enough to choose between a two-year, fixed-rate deal now or staying with a variable mortgage. Imagine making a call on the trend of interest rates you’d be locked into for 25 years. Cath Hearnden of mortgage brokers My Mortgage Direct says this is a point even the Government’s advisers concede.
Persuading borrowers to take out longer-term fixed rates could make the housing market more stable. But when Professor David Miles reviewed the UK mortgage market for the Treasury in 2004, he concluded that long term, for most borrowers, was more likely to mean 10-year, not 25-year, deals.
Long-term fixed-rate deals have other drawbacks. Most obviously, you could tie yourself into a loan when interest rates are at a peak, and face paying that rate for another two and a half decades even if rates fall. Imagine having taken out a 25-year fixed deal in 1989, when rates peaked at 15 per cent…
Few expect rates to hit those heights again, but there are other problems. Although most mortgages are portable (borrowers keep the same mortgage if they move house), the new house still has to meet the lender’s rules on survey and valuation. And if you want to downsize to a smaller mortgage, or switch lenders, you’ll face hefty redemption penalties.
Some lenders do offer 25-year fixed rates with some flexibility: Hearnden points to Nationwide’s 25-year fix, which has no redemption penalties after 10 years.
To establish whether such a deal might be better than a two-year fixed or a variable-rate mortgage, you need to look at interest rate, fees and flexibility. “If a borrower can visualise their life remaining relatively unchanged and they want financial stability, a long-term rate is preferable,” Hearnden says. But you need to be absolutely honest about how stable your life is likely to be.
Foxed by jargon? Confused by all the options? Email a question to mortgageclinic@independent.co.uk. We will not reveal your identity, and we cannot give specific advice. If your question is printed, you’ll receive a 50 voucher from Amazon.co.uk, so you can kit out your home with anything from a lawnmower to an espresso machine (www.amazon.co.uk/homeandgarden)
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