You might think that you know some very good reasons to choose a fixed rate of 5 years or longer. Perhaps the most obvious reason is the security and peace of mind that this will give to you and your family.
Admittedly in the current climate of fiscal uncertainty. With interest rates starting to rise in the near future and the possible effects of Brexit, longer term fixed rates are very appealing. It is true to say that the Bank of England are also keen to see financial stability in the mortgage market and to see mortgage holders on longer term fixed rates, especially as they are still very concerned about the increasing level of personal debt including mortgages in the UK.
The bank is certainly imposing tighter guidelines for mortgages with the likelyhood that they will tighten them even further. Mortgage lenders are required to be more vigilent over how they assess applications, in particular how they stress test them to safeguard the applicant’s and the UK economy against any future shocks that rising interest rates and inflation might bring.
It is clear to see the effect that strees testing has on how much applicant’s can borrow. For instance someone wishing to borrow on a fixed rate term of less than 5 years will have their application stress tested at the lenders variable rate plus 3%. For example, a typical lender whose variable rate is possibly 4.5%, the application will be stress tested by the lender at 7.5% resulting in many cases a much lower mortgage. For applicants taking out a 5 year fixed rate the application will be stress tested at the pay rate and with 5 year rates starting as low as 1.65% its not rocket science to realise that the lender will be able to agree a larger mortgage without the risk of disappointment at a later stage. What we have seen a lot of, is intially an ammout is agreed at the beginning of an application, but this is then reduced at a later stage after the lender has applied the stress test.
Sorry if this seems very technical, but this is the modern way that mortgage lenders have to behave. Its good for us all to enjoy financial stability and one of the best ways of doing this is to fix your mortgage payments for a good period of time, as they are likely to be the largest monthly financial commitment that you have.