Cheaper long-term mortgages are back

MORTGAGE rates are plummeting. Interest rates on gilts and swaps – those things that indicate the price of fixed-rate mortgages – have been heading downwards for some time and look to set to stay there. Now lenders seem to have caught on and have started dishing out the goods. Last week, Chelsea Building Society launched an almost revolutionary deal of a 3.99 per cent ten-year fixed-term mortgage. “The rate is pretty much unheard of,” says personal finance expert Andrew Hagger of Moneynet.co.uk, “a year or so ago, anything below 5 per cent on a five-year deal was good.” But is this mortgage as good as it seems?

The deal allows for certainty and peace of mind, says Danny Cox of Hargreaves Lansdowne. “Any family on a tight budget will appreciate knowing precisely how much they are obliged to pay for the next ten years.” And while the £1,495 arrangement fee seems steep, you shouldn’t have to pay another one for ten years.

AIMED AT SAFE BETS
The trouble with this deal, however, is that it is aimed at uber-safe and stable borrowers. You need a 30 per cent deposit. Clare Francis of Moneysupermarket, thinks that this could be connected to the bank’s need to hit lending targets this year. Chelsea declined to comment. But with consumer confidence and banks’ eligibility criteria so weak, Francis thinks this is a plausible reason for the give-away prices.

It’s not just a large deposit that might hold you back. Borrowers keen for this deal need to be sure that they aren’t moving home. While the deal is notionally portable, Francis says most people don’t tend to move their mortgage with them and often end up taking the financial hit. The penalties for early repayment are high. Those paying back a mortgage within the first three years are charged 7 per cent of the mortgage balance. That’s up to £14,000 on a £200,000 loan.

Reassuringly, however, Francis says: “I doubt those confident that they are staying put for the next ten years will regret signing up to a 3.99 per cent rate.”

Cox is less certain: “The rate is much higher than the Bank of England (BoE) base rate, so I don’t think it is a good idea for those on good base rate tracker deals.” He expects rates will stay lower for longer than many expect. “Those on base rate tracking mortgages can use any extra disposable income to pay down their capital and take real advantage of the cost savings.”

TAKING YOUR PUNT
Borrowers must take a punt on the BoE’s actions. Those who think rates will rise should grab a good deal like Chelsea’s while it lasts. Those who think the base rate will stay low over the next decade should use a tracker to get the best deal. But beware of the risks that come with a tracker: who knows what will happen in the next decade. From July 1988 to September 1991 interest rates were over 10 per cent. Could you cope with these rates today?

FOCUS ON: CHELSEA BUILDING SOCIETY DEAL

THE DEAL: Chelsea Building Society is offering a 10-year fixed-rate mortgage at 3.99 per cent.

THE GOOD: If you have even the slightest inkling of a rate rise in the next decade buy this – it’s one of the lowest ten-year offerings seen in years. Not to mention, knowing precisely how much your payments will be for a decade is reassuring.

THE BAD: You need a 30 per cent deposit to qualify and the arrangement fee is expensive at £1,495, but spread across ten years, this can work out cheaper.

THE UGLY: This deal gets nasty if your circumstances change. Divorce, upsizing or downsizing could land you with a cruel 7 per cent penalty in the first three years.