Research from Stroud & Swindon Building Society has highlighted that two-year fixed rates have saved borrowers more money than if they had taken out a ten-year fixed rate mortgage.
The research flies in the face of the call by Chancellor Alistair Darling for more longer-term fixed-rate products to be available in order to help first-time buyers to get on the housing ladder.
His reasoning was that a long-term fixed mortgage would allow borrowers to fix repayments and allow them to budget accordingly.
S&S says that a 10-year fixed rate mortgage taken out on a £100,000 property in 1997 would have had a rate of 7.3 per cent resulting in repayments of £88,141.20 to date. If, however, the borrower had taken out a standard variable rate mortgage in 1997 the repayment to date would be £80,340.97, saving £7,800.23.
Overall, the most cost effective option would have been to take out a series of five 2-year fixed mortgages that would result in a repayment of £77,903.76. This is a significant saving of £10,237.44, greatly outweighing the costs of any additional fees paid along the way for re-mortgaging.
Sales Director Paul Chafer says: “Whilst it is obvious that something needs to be done in order to help first time buyers get on the housing ladder, the current 10-year mortgage deals are not necessarily the right solution. First-time buyers are usually on a very tight budget so any saving they can make on their mortgage repayment helps. This research shows that long-term fixed rate mortgages are not always the most cost effective option.
He adds: “What is required is a flexible solution that allows borrowers to borrow more or less on their mortgage on a regular basis if and when their circumstances change. First-time buyers will obviously be looking to move up the property ladder so will not want to be tied into a long-term mortgage. However, this type of product could, in certain interest rate climates, be the perfect answer for borrowers who have moved into a property that they intend to stay in for a significant period of time.”