Why a long term fixed rate could help you bypass strict mortgage checks
Lenders have seen a rise in the number of borrowers choosing five or even ten year fixed rate mortgages in order to bypass strict new affordability checks. It has emerged that taking a long term fixed rate removes the requirement for a lender to ‘stress test' whether you could continue to afford your mortgage if interest rates rise.
The Daily Telegraph reports that ‘borrowers and lenders are shunning shorter fixed-rate mortgages' in order to get around these new rules. Keep reading to find out more.
Long term fixed rate deals avoid some affordability tests
Since April, lenders have been required to prove that you can not only afford your new mortgage now but also if interest rates were to rise over the next five years. If you apply for a short term fixed rate you must have a cushion in your disposable income to prove that you could still afford your repayments at the higher rate.
Now, it has emerged that these tests are not needed if you take a fixed rate of five years or more. This has led to a surge in demand for long term fixed rate deals and a rush of new 10 year fixed rate products being brought to the market.
Mortgage expert Andrew Montlake told the Telegraph: "Some lenders apply the stress test to all borrowers but others don't. They are certainly not required to under the new rules, meaning some lenders' checks will be less onerous for five-year deals."
Taking a longer term fixed rate deal would also help you to avoid another round of affordability checks if you came to remortgage in two or three years.
Keith Osborne, editor of new homes website whathouse.co.uk, said: "Long term fixed rates have never been popular in the UK because of their lack of flexibility and the fact that they frequently come with large early repayment charges. In addition, they are often more expensive than shorter term deals. However, lenders are beginning to innovate with these products and the fact that they can help borrowers to circumvent these tough new affordability checks could also be attractive."
Newcastle Building Society has recently launched a 10-year fixed rate which only has early repayment charges for the first five years. This means that you can avoid interest rate rises for a decade, but you retain the flexibility to remortgage or move home after five years without penalty.
Mr Osborne added: "As with other types of deal, it's important to balance both the interest rate of a fixed rate deal and the arrangement fee. For example, paying a higher fee for a lower rate on a long term deal could save you money. Consult an independent mortgage broker who will be able to help you work out which is the right deal for you."