Mortgages. Short Term Advice

Exploring New Types of Home Loans: Are "Lifetime" Mortgages the Future?

Recently, new home loan products are emerging, advertised as "lifetime" loans. These products promise stability over the long term, but they might not be the only option available. For those who are willing to shop around and explore different offers, there are still good deals to be found.

Understanding "Lifetime" Loans

These "lifetime" mortgages offer a fixed rate for the entire duration of the loan, which can be appealing for borrowers seeking long-term stability. For example:

• Woolwich offers a lifetime tracker mortgage with a rate guaranteed to be 0.19 percentage points above the base rate. With the Bank of England's base rate at 4.50%, this results in a current rate of 4.69%.

• Abbey offers a flexible mortgage that allows for offsetting and withdrawals, with a slightly higher rate of 5.09%. This flexibility can be useful if you want to use your mortgage as a savings account.

Comparing with Short-Term Deals

Mortgage brokers often recommend short-term discounted mortgages, which involve a lower rate for a set period, typically two years. After this period, borrowers are advised to shop around for better rates. This approach is known as the "rate tart" strategy, as borrowers frequently switch to new deals to find the best rates.

For loans over £150,000, this strategy remains effective. However, for loans under this amount, the decision between short-term and lifetime loans requires careful consideration.

Example Comparison

Let's compare two options:

1. Woolwich Lifetime Tracker:

   • Current Rate: 4.69%

2. Portman Building Society’s Two-Year Fixed Rate:

   • Current Rate: 4.19%

   • Additional Costs: Legal fees (£350), Application fee (£499), Valuation fee (£300), Deeds release fee (£199), totaling approximately £1,350.

Cost Analysis:

• Portman Fixed Rate: The initial rate is cheaper by 0.50 percentage points, which translates to a saving on interest over the Woolwich deal. However, the associated costs for switching amount to about £1,350.

• Woolwich Tracker: While the rate is higher, it offers the benefit of stability over the long term.

Flexibility vs. Fixed Rates

• Abbey’s Flexible Plus Tracker offers higher flexibility with a rate of 5.09%. This option is beneficial if you value the ability to offset and withdraw funds, using the mortgage as a type of savings account.

Conclusion

The best mortgage deal depends on your financial situation and how long you plan to stay in the property.

• For loans over £150,000, short-term discounted mortgages and switching regularly might still be the best strategy.

• For loans under £150,000, consider the overall cost including fees and the value of flexibility. The lifetime options might offer better long-term stability, but the initial savings and associated costs need to be carefully weighed.

Final Advice

Mortgage markets evolve, and new offers frequently appear. To ensure you get the best deal, regularly check with online brokers who can search the entire market and find the most competitive rates for your specific needs.