10 reasons why consumers should consider a fixed for life mortgage

Finding your own home and getting a mortgage are big decisions that will impact you and your... 25 January 2021 by Perenna

In the UK, we’ve traditionally had a preference for short-term fix mortgages. Luckily for consumers, changes are coming to the market – a fixed for life mortgage where the interest rate is fixed for the whole loan duration!

Here are 10 reasons why you should consider a a fixed for life mortgage.

1 Borrow what you can afford

Since the global financial crisis, it has become increasingly difficult for consumers to get on the property ladder. The United Kingdom is experiencing an affordability crisis and housing is expensive in relation to incomes. New regulation following the financial crisis requires that lenders ensure borrowers can afford their mortgage payments and apply strict affordability underwriting criteria. This protects the borrowers from higher interest rate environments but also restricts the amount that a consumer can borrow under a variable or short-term fixed-rate mortgage.

In contrast, a fixed for life mortgage offer consumers the same interest rate throughout the loan term. By fixing the interest rate, the fixed for life lender does not have to stress test borrowers for potential rate rises. As a result, certain borrowers can borrow more under a fixed for life mortgage.

2 Borrow with a smaller deposit

A mortgage is a loan secured by an asset – the house. To issue the loan, the lender has to be certain that a) the borrower can sustain paying the monthly payments throughout the lifetime of the loan and b) that the outstanding value of the loan does not exceed the value of the asset. Fixing the interest rate and locking in monthly payments years ahead enable the lender to gain more confidence in the repayment ability of the borrower. This enables lenders to issue loans on a higher LTV basis.

3 Never overpay

With a fixed for life mortgage, you never have to worry about adjusting to a standard variable rate which may be more costly. The standard variable rate is what a borrower is transferred onto when the short-term fix mortgage ends. The lender can set the rate at any level they want, meaning your monthly payments are uncertain. Some borrowers who are caught on a standard variable rate are unable to refinance their mortgage.

4 Don’t worry about remortgaging

Getting a mortgage can be a stressful undertaking. It’s not fun spending weekends looking through price comparison sites and evenings speaking to mortgage brokers. Many borrowers with short-term mortgages have to remortgage every 2nd or 5th year.

Luckily, with a fixed for life mortgage, you don’t have to worry about refinancing. Ever. Unless you want to.

5 Budget with confidence

A 30 year fixed for life mortgage brings certainty to expected spending and enables you to budget years ahead with confidence. Knowing your largest financial outgoing is certain for 30 years will help you plan for the other things that matter in life. Life is full of surprises but a fixed for life mortgage won’t be!

6 Make key life decisions without the baggage

Being free to make key life decisions is a must. Short-term fixed mortgages often come with early repayment charges, preventing borrowers to move and make big life decisions. An early repayment charge is a penalty applied if you repay your mortgage during a tie-in period. This will re-set after each remortgaging. A fixed for life mortgage will only have early repayment charges for the first 5 years. Hereby providing borrowers with 25 years freedom and flexibility to live their lives to the fullest.

7 Freedom to move with full portability

Another important flexibility component of fixed for life mortgages is porting – the ability to port your mortgage to a new property. Porting your mortgage means transferring the same mortgage deal to a different property – while keeping the same lender, interest rate, loan amount and rules. One advantage of porting a mortgage is that if you’re still in a tie-in period, you don’t have to pay any early repayment charges if you port. If you’re no longer in the tie-in period, you will also be a position to evaluate the market terms and see if there are better deals available. Win-win!

8 Protection against market changes

You can control many things in your life, but the economy, house prices, job market and government regulation are outside of most peoples control. Typically, if the housing market goes down in value close to your remortgaging date, the available products to you may be more expensive. or in some cases lenders may not lend to you at all if the loan to value is too high. In some cases, banks might not be able or willing to lend to you due to changes in rules. General rule changes are introduced for a good reason but might have unintended consequences. When the bank regulators changed the rules in 2014 to protect against the next crisis, many people could not refinance and were stuck on a high-interest rate, more largely known as mortgage prisoners.

A fixed for life mortgage is protection against uncertainty and events outside of your control. You will have full clarity of monthly payments for the next 30 years and will not be paying more if rates start to rise.

9 Borrow in retirement

Later life borrowers often have difficulty obtaining a mortgage. Mortgage lenders are wary that their pension incomes may not be sufficient to absorb interest rate rises. Therefore, lenders have limits on how old a borrower can be when they take out a loan and how old they will be when it ends. The closer the borrower is to the maximum age, the less time they will have to pay off any new mortgage.

A fixed for life mortgage is the solution. As long as the borrower can afford the fixed monthly payments, there is no concern of interest rate rises. Later life borrowers can get on with their lives and support their living costs in retirement, provide financial assistance to family members and live independently in suitable homes for as long as they are able and want to.

10 The right timing

The interest rate is at a historic low. If you’re too young or don’t remember the 80s it’s worth asking someone you know about their mortgage experiences back then. In 1985 the interest rate reached 17% and there was no certainty the rate was coming down. The world is different today. We’re facing great uncertainty about the future. This is reflected in the interest rates. A low-interest rate fixed for life mortgage looks like the perfect loan for borrowers who want financial stability and knowing how much money they will spend in years to come.

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