A fixed-rate mortgage can offer security to homeowners, especially during the kind of uncertainty the economy is currently facing. Having a fixed interest rate means you know you will be paying the same amount every month, allowing you to plan the rest of your finances around your mortgage.

Compare this to a variable-rate mortgage, in which your payments can potentially change from month to month, and the advantages are clear. However, variable-rate mortgage payments can fall as well as rise, so it is hard to predict whether a fixed-rate mortgage will save you money, or cost you more.

Fixed-rate mortgages most commonly last around two to three years. However, a number of lenders have started offering much longer terms in recent years - lasting 10, 15 and even 25 years.

Here we take a look at the pros and cons of long-term fixed-rate mortgages.

Advantages of long-term fixed-rate mortgages

Long-term security
Fixing interest rates for 10 or 25 years means that you will know how much your mortgage outgoings will be for up to the duration of your mortgage. This allows you to plan the rest of your finances more easily, and is a guarantee that you will not experience any shock rises in your monthly payments - one risk associated with variable-rate mortgages.

Only pay one arrangement fee
Two-year or three-year fixed-rate mortgages mean that you are likely to pay an arrangement fee every two to three years. Some lenders will allow you to add this onto your mortgage, but this will incur added interest and increase your monthly payments. In August, Moneyexpert.com said the average mortgage arrangement fee was £860 - which could be a burden to many homeowners.

A long-term fixed-rate mortgage only carries one arrangement fee, and in many cases this is no more expensive than those on two or three-year deals. Over the course of a 25-year mortgage, that could save you between £6,880 and £10,320 compared with three-year and two-year fixed-rate deals with similar interest rates and arrangement fees.

Disadvantages of long-term fixed-rate mortgages

You could still end up paying more
If interest rates go down while you are on a fixed-rate deal, you will not reap the benefits, since your rate is fixed. If your terms are fixed for as much as 25 years, and average mortgage rates over that period are lower than your deal, you could end up paying more than if you had a) chosen shorter terms and remortgaged every few years, or b) chosen a variable-rate mortgage.

Short-term fixed rate deals could be cheaper
Despite the convenience of only having to pay one mortgage arrangement fee, a long-term fixed rate could still cost you more than if you had remortgaged every two or three years.

Let’s assume you have a £120,000 mortgage with a 25-year fixed rate of 6%, and a mortgage arrangement fee costing the average £860. In total, the mortgage would cost you just over £775 per month.

Now let’s assume remortgaging frequently gets you an average interest rate of 5.5% over the course of 25 years, after which your mortgage is completed. That’s an average £734 per month. Even if you spread the £860 arrangement fee across your monthly payments, that’s £758 per month on a three-year deal, or £770 on a two-year deal.

Early repayment charges
Most fixed-rate mortgage deals carry early repayment charges, since any early repayments reduce the amount your lender will receive in interest. On long-term fixed-rate mortgages, these tend to be higher than on shorter-term deals - so while there is scope to remortgage if you find yourself paying too much, it will cost you a lot to do so.

So should I choose a long-term fixed rate mortgage?

As with many financial decisions, there is no clear-cut answer to this question. Nobody can successfully predict what will happen in the financial markets, and when choosing a mortgage you will always hope other deals do not become cheaper.

The most important thing is to make sure you will still be able to afford your mortgage if your payments increase. Before you decide on a mortgage, take a look at the existing rates and work out how much your monthly payments would rise if your interest rate went up by one or two percentage points. If you are unsure, make sure you ask an expert mortgage adviser.

Author Info:

Melanie Taylor is a Mortgage and Remortgage expert from www.ThinkMoney.com

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