Mortgages

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By Naomi Caine

Wouldn't it be nice to be able to predict the cost of your mortgage over the next decade? Household expenses are rising fast - you only have to think of gas bills and now council tax payments. A mortgage is often one of the biggest expenses, so a rate fixed over ten years would allow you to budget with certainty, which could be a relief in these uncertain times.

If you like the idea of a 10-year fix, you might also like the current crop of cheap deals. Woolwich recently came out with a rate of 4.67% over ten years. Leeds building society is offering a rate fixed for 10 years at 4.69%, or you can get 4.75% with Newcastle building society.

A fix is always a gamble. If inflation picks up, the Bank of England's monetary policy committee would be forced to raise interest rates. Mervyn King, the governor of the Bank of England, has already admitted that he is puzzled "why long-term rates are at such remarkably low levels." So you would feel pretty smug if you fixed for ten years at a cheap rate.

But if the base rate fell from the current 4.5% to 3.5%, you might be able to get a two-year fix in 2014 at less than 4%.You might decide that you are prepared to take the gamble. After all, 4.67% is still a pretty good rate even if the base rate falls. And you are buying peace of mind.

John Wriglesworth, a property consultant, says: "You should not really use your mortgage to bet on interest rates. It is more of an insurance policy, so a 10-year fix might be sensible."

The government would also like us all to take out long-term fixed rates because it believes they would bring greater stability to the housing market. Labour argues that house prices would not move up and down so far or so fast if they were not so directly linked to the movement of interest rates.

Simon Tyler of Chase de Vere Mortgage Management, a broker, says: "In an ideal world it would make perfect sense for everybody to take out cheap, long-term fixes, securing affordable finance for their homes and removing the need to remortgage so often. And there's no doubt that the latest batch of 10-year fixes is fantastic value."

So, why aren't we all rushing to lock into a cheap fixed rate for the next decade? The big problem with long-term fixes is the hefty early repayment charges.

Woolwich charges 4% of the outstanding mortgage amount if you want to switch or pay off the loan within the ten years. So, if you have a £250,000 mortgage, you would have to pay a penalty of £10,000.

Other lenders stagger the early repayment charges. Leeds , for example, charges 6% in the first two years, falling to 2% in the final year.

Tyler says! : "If you get divorced, are made redundant, or decide to sell your home and move to a smaller property, then you will be hit with an early repayment charge. The penalty could easily wipe out any savings you have made on the home loan, so your cheap long-term fix could backfire."

You might also have a problem if you want to trade up the housing ladder. You can usually take your mortgage with you when you move home, but if you want to borrow extra money you will have to take out a new mortgage with your existing lender. Tyler says: "Who knows what rate will be on offer at the time? Worse, you might find that your lender no longer considers you a suitable applicant, effectively forcing you out of the deal and triggering the early repayment charge."

Longer fixes of 15, 20 or even 25 years usually come with a window that allows you to escape penalty free, say in the fifth year. But they are often more expensive. Cheshire building society, for instance, offers a fix until 2020 at 4.99% but will let you escape without penalty in April 2011, 2012 and 2013, so you need only be tied in for five years.

Many people prefer the greater flexibility of a short-term fix of say two or five years. You are then free to switch or pay off the loan after the fix runs out.

David Hollingworth of L&C Mortgages says: "The rates on 10-year fixes at the moment are really quite low and only a little higher than a five-year fix. The current best five-year deals are just below 4.60%. But most borrowers just don't like locking in for that long and will often opt for the cheaper rates available on shorter term deals."

Portman is offering a rate of 4.30% on a two-year fix. Yorkshire building society is not far behind at 4.38%. If you had a £100,000 mortgage and took out the Portman deal your monthly payments over 25 years would be £545, compared with £565 with the Woolwich 10-year fix. There's not much in it - if you're sure you won't want to switch any time soon.