09:42 12 June 2013
Barclays has just launched a brand new mortgage deal under its Woolwich brand, which offers a market-leading fixed rate of interest for the next 10 years. But is a long-term deal like this really the best way to fund your home? We take a look at the pros and cons.
What's the deal?
Woolwich - the mortgage lending arm of Barclays - has launched a deal fixed until 30 June, 2023 at a rate of 3.89% making it the cheapest of its kind on the market (the overall cost for comparison is 4.1% APR).
You will need 30% of your home's value, either as a deposit or existing equity to apply for the deal alongside an arrangement fee of £1,499.
As is typical of fixed rate mortgages, this deal comes with early redemption charges (ERCs) for the duration of the loan term. These are a fixed 6% of the outstanding mortgage amount if you redeem any time before 30 June, 2020 and 3% of the outstanding amount if you redeem in the last three years until 30 June, 2023.
Who is it good for?
Any homeowner or new purchaser who is looking for a fixed budget on their housing costs in the long term and is prepared to settle in their current home - for example, if you have a young family and have moved for the schools in the local area, this mortgage could be ideal.
The obvious catch with this mortgage is the fact you are tied in for an entire decade and if you wanted to sell up and pay off the mortgage during this time - perhaps to move overseas - the penalties are pretty unforgiving.
For example, if you have £200,000 outstanding on your mortgage and want to redeem in the first seven years, it will cost you a staggering £12,000. On the same outstanding amount, it will still cost £6,000 to redeem at any point within the final three years of the deal.
While the mortgage is portable (which means that theoretically, you can pick it up and take it with you to a different property), the Woolwich will still need to agree that the home you are moving to is adequate security for the loan. If it's an unusual structure or even too close to commercial premises for example - it might not.
Your affordability for the loan will also be completely reassessed if you want to move - even if your payment history has been perfect. So in the fairly likely event that your circumstances change during this time - for example, you become self-employed or even give up work altogether - you may face the choice of being stuck in your current home or stumping up the ERCs to move.
Even if you don't want to move but come into some money over the next decade - such as an inheritance - you will not be able to clear your mortgage without being charged. The maximum you will be able to overpay fee-free on this deal is 5% a year - much less generous than the standard 10% you find with other mortgage lenders.
What's the verdict?
So long as you know you are settled in your home for the long term - and are not due any windfalls or inheritance - this is a great deal as it means you can freeze today's unprecedented low interest rates for the next 10 years. And of course, by this time they could be much higher.
If you do fall into this camp, you also know you are getting the best deal available. (The next cheapest 10-year deal is from Santander priced at 3.94% (reverting to 4.74%) which comes with a higher deposit requirement of 40%.)
If you are not certain of the next 10 years however, you could be better off taking a shorter-term deal. Halifax for example, has just launched a new fixed rate mortgage priced at a top-of-tables 2.45% for five years, with a £1,995 fee. It requires a minimum deposit of 40%.
Over a two-year term (with ERCs to match) the Post Office has just launched a deal fixed at 2.55%, also in return for a deposit of 40%. This is not lowest rate on the market, but it comes with the bonus that there's no arrangement fee to pay.
YOUR HOME MAY BE REPOSSESSED IF YOU DON'T KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Please note: Any rates or deals mentioned in this article were available at the time of writing.
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