There are only two mortgages worth buying
Choosing a mortgage is not just simply about comparing prices. The large variety of deals makes sure of that.
Depending on the economy and market conditions, some types of mortgage can be better priced than others. Then there are personal circumstances to consider. This involves your own financial and family circumstances and how those could change in the future.%VIRTUAL-SkimlinksPromo%
We need to consider all three to get both a great deal and make a good tactical decision. With that in mind, let's consider different types of mortgage, and try to find some specific deals that fit.
Short-term deals are very risky
The best short-term fixes certainly pass the test of being cheap.
By historical standards, 3% or so is fantastically low. The same goes for short-term trackers, which cost about the same.
Whether you fix or stay variable, you're locked in for those short years. But what happens next? What happens if, by the time your deal ends, lenders and borrowers are already thinking that rates are going to rise?
Forget the Bank of England base rate; that'll probably have little bearing on this issue. What's likely to happen is that a sudden, massive influx of applications for long-term fixed deals will swamp lenders. Lenders will close these deals rapidly and replace them with much more expensive versions.
There's an excellent chance your application will be buried too deeply under a mountain of others. Your dilemma then is deciding whether to fix long term at a much higher price or stay in a short-term or variable-rate rollercoaster, hoping that the savings you made from your short deals in the early years won't be more than wiped out later by higher rates.
Medium-term deals are better
Here we're looking at maybe four to seven years. These currently cost between 3% and 5% per year.
I quite like these deals because, in historical terms, you could rarely have nabbed such a safe deal, lasting so long, so cheaply.
However, you could easily still have similar problems at the end as with the shorter deals.
I estimate that if interest rates were to go back up to near their historical average over the next five to ten years, you're likely to pay more over the long-term if you choose these mortgages than with a much longer fix currently available, which I'll write about towards the end of this article – and that's even if you overpay with these mortgages in the earlier years and your salary rises roughly in line with inflation during the fixed period.
High LTV mortgages worry me
Mortgages are only cheap right now because of low interest rates, and certainly not because of house prices. Mortgages with higher loan-to-values are nothing like as cheap, however.
Not only do they have higher interest rates, there's even less choice when it comes to longer deals. In addition, they're extremely risky if house prices were to fall, if you were to lose an income, if you had to move in a hurry, or if lenders make their lending criteria even tougher in future.
If you've got a small deposit, it could be wise to bide your time and apply your efforts to saving a bigger deposit.
Lifetime tracker mortgages
Now we come to one of the two mortgages that I think is probably a great tactical decision for millions.
The best lifetime tracker mortgage available seems to be the HSBC lifetime tracker, charging between 2.6% and 3.6% for those with medium to low LTVs, and fees from £0 to £1,000.
Why is this mortgage so good? Apart from its currently low interest rate, it has no early-repayment charges, which means, when the time comes to quickly fix, you can apply for a long-term deal before millions of others, who'll be stuck in their short-term deals, gnawing their fingers.
That said, many of you are likely to be over-confident and still get the timing wrong. Remember that millions of home owners are sitting on their standard variable mortgages with no tie ins, which means they can apply for another mortgage as quickly as you can. Plus, lenders can act predictively. Better to switch away again early, not late.
This HSBC mortgage also allows unlimited overpayments.
Long-term fixed-rate mortgages
Here we're looking at ten-year fixes and upwards. The best of these, in my view, is unquestionably Manchester Building Society's deal. This is fixed for the length of the mortgage, which can be ten to 25 years, at 5.24%, and with a £1,000 fee.
Naturally, you'll get the usual argument from the entire industry. That argument is that you're tied in for a long time, which is risky. Notice that those same experts never put as much emphasis on the high risks of using the short-term deals they like to keep selling us, and that it tends to be lenders with fewer angry customers and more transparent terms and conditions, such as building societies, who offer the long-term fixes.
The industry's argument holds a bit of truth, but, really, if you've bought for sensible reasons, at a price you can comfortably afford, and at a time when you're as confident about your future geographic and financial stability as you can be, these things shouldn't scare you.
Especially as the Manchester BS mortgage is portable.
In addition, the early-repayment penalties are for a relatively short seven years, and they're relatively low, at just 1.5% in the first five years and 0.75% in the following two.
Workarounds for everyone else
In practice, millions of you will have bought at prices you can't afford. You haven't bought at a time of family stability. You're worried about your future income and jobs in your area. You have bought merely with the hope of jumping onto the next rung as quickly as possible. You can't really afford to go up to, and over, 5% interest rates. In short, you've not bought at a sensible time for sensible reasons.
Your previous decisions have stretched you so much financially that your application for the two top deals I've mentioned wouldn't be accepted anyway and, because of the deep uncertainty of your future and your financial position, they might not be best for you.
You'll have to try something else. Here are two quick ideas.
Firstly, you could overpay. Although in the long run you shouldn't expect to do as well as someone who could get the Manchester BS mortgage, this will still massively reduce your costs in the long run, improve your record, and make your position safer.
Secondly, you could apply for a mortgage every three to six months even before you want it, locking in the rate for several months with no obligation to buy, and accepting it only when you believe mortgage rates will rise. Unfortunately, however, more and more lenders are charging a non-refundable booking fee for this privilege, so keep your eye out for that.
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