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September 2007

FIXED MORTGAGE FOR A QUARTER OF A CENTURY

Emma Singer, a mortgage consultant at Acumen Financial Planning, discusses the pros and cons of the newly launched 25-year fixed rate mortgage:

Buying a home can be a confusing time, with literally hundreds of financial package options to consider. However, Nationwide has recently launched an innovative new mortgage package which is fixed for quarter of a century. Capitalising on the recent uncertainty in the market because of rising interest rates - which are currently at their highest since 2001 - and spiralling house prices, the rise in popularity of fixed rate mortgages has been a marked feature of the UK mortgage market for a number of years. The 25-year fixed rate mortgage gives homebuyers a completely new option, and offers an additional layer of protection for many people who are looking for long-term security.

A major benefit of a 25-year fixed mortgage is that it protects the homebuyer from dramatic increases in interest rates. Many buyers will still have horror memories of the early 1990s when interest rates were more than 13%. For those who struggled during this time, this arrangement provides the option of securing a rate for the entire mortgage term, giving them peace of mind that they won’t have to revert to 'the bad old days'. Both homebuyers and those simply wishing to transfer their existing mortgage will know exactly what they are paying for up front, giving them additional security about future payments.

The new mortgage scheme reflects a more European style arrangement, where mortgages are commonly set for life. It is also transferable from one property to another, so buyers are not constrained to living in one property for the next 25 years. Another advantage is the convenience of not having to deal with mortgage renegotiations, and not having to pay arrangement or set up fees every few years. Clients are also free to withdraw from the arrangement after 10 years without incurring an early repayment charge.

The obvious downside to the mortgage is that homebuyers risk losing out if the interest rate stays low for a significant period of time. The option is also only available to those who are able to pay a minimum deposit of 5% of the property value or purchase price (whichever lower) and in the current market this will undoubtedly exclude many buyers. The interest rate is fixed at a slightly higher rate than most two-three year fixed rate mortgages, and although buyers can pull out after 10 years, the penalty for leaving this mortgage beforehand is quite severe.

 
Companies in the Acumen Group include Acumen Accountants and Advisors Limited, Acumen Financial Planning Limited and Acumen IT Consultancy Limited. Acumen Financial Planning Limited are authorised and regulated by the Financial Services Authority. Acumen Accountants and Advisors Limited are registered to carry out audit work and are regulated for a range of investment business activities by the Association of Chartered Certified Accountants but are not authorised and regulated by the Financial Services Authority. Acumen Financial Planning Limited, Registered in Scotland number 215343, VAT Number 894 6221 94. Acumen Accountants and Advisors Limited, Registered in Scotland number 153885, VAT Number 894 6221 94. Acumen IT Consultancy Limited, Registered in Scotland number 284749, VAT Number 859 474862. Acumen Holdings (Aberdeen) Limited, Registered in Scotland number 215503, VAT Number 894 6221 94. Registered office, Commercial House, 2 Rubislaw Terrace, Aberdeen, AB10 1XE.