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Has your fixed-rate mortgage got a sting in its tail?

Has your fixed-rate mortgage got a sting in its tail?
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Sometimes, getting a fixed-rate or any kind of mortgage might feel like walking into a casino. There’s lots of sounds and flashing lights, and let’s be honest, we don’t really have a clue what we’re doing. You might find yourself at the roulette table putting it all on red and the fun is over very quickly. But at least when you walk into a casino, you understand that you’re taking a risk. You might not really have much of a clue about the optimal betting strategies for Blackjack or what on earth the difference is between Texas Hold ‘Em and Omaha, but at least you understand you make your bets, and you win or lose. Even with the expectation that usually the house wins.

But when it comes to buying a house, the biggest purchase you’ll typically make in your life, do you really understand what the risks are? The Motley Fool has told you the main differences between the typical mortgages, and you might have a vague idea that the Bank of England interest rate they bleat on about in the news every couple of months might have some correlation to the mortgage rate you pay. You might even have a decent feeling that the interest rate environment is pretty low right now. But what are the downsides to committing to a long-term fixed interest rate?

Yes, fixed-rate mortgages tend to be slightly more expensive than their variable counterparts, and you lose out if the prevailing interest rate goes down. But the real sting in the tail of a fixed-rate mortgage can be the early repayment charge (ERC). Sounds very transactional, doesn’t it? But it could cost you thousands of pounds, even tens of thousands if you’re not careful.

Many people think about buying life insurance or critical illness cover to protect their financial interests. In fact, this is a multi-million pound industry in its own right. At the heart of this is an acceptance that sometimes things in life don’t turn out the way you’d expect. Why, then, do so many buyers of a fixed-rate mortgage product ignore the ERC?

Even worse, not all exit plans are created equal. Do you know whether you can “port” your fixed mortgage product if you were to move home? A port isn’t just a place where a ship goes to visit, it’s a mechanism of transferring your mortgage to a new home you purchase. Not all mortgages allow you to do this, so you may well enter into a 5 or 10-year fix knowing full well you are likely to want to sell your home in that period, but not understanding the potential costs of doing so.

Even if your mortgage does in theory allow you to “port” the product, you may find your personal circumstances have changed. For example, your partner had a job but then life changed, as it does, and decided to look after the kids because the cost of childcare is so prohibitively expensive. It might make no financial difference to you, or bizarrely you might even be in a better financial position, but your mortgage provider might not like your household only having one income now. Computer can — and regularly does — say no.

And don’t even get me started on the dreaded housing chain and what if you decide to sell before you buy. Some fixed-rate mortgages provide some scope for this, but not all, and it’s often very limited. Even if you have the luxury of a port and can make it work, you might find yourself feeling forced into making a decision that’s not right for you because of the potential cost of the ERC.

The trend for financial products is to make them all seem equal so we focus on the headline rate, but with fixed mortgages the devil is very often in the detail and not all fixes are made equal. The next time you consider a long-term fixed mortgage product, make sure you fully understand the product you’re buying. Otherwise you might find yourself on the roulette table with an unpleasant surprise when the spinning stops.

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