A Tale of Two Mortgages: fixed-term considerations

Once upon a time, two friends, Emma and Liam, found themselves starting a new journey into home ownership at the same time. Excitement filled the air as they explored the possibilities of turning houses into homes.

Emma and Liam, both first-time buyers, were eager to secure their dream homes. Emma snapped up a delightful 3 bedroom apartment in highly sought after building and Liam had an offer accepted on a charming 2-bed terraced house, for a similar price. Little did they know that their paths would diverge when it came to choosing the right mortgage.

Emma, relied on the recommendation of her mortgage broker and opted for a 2-year fixed-rate mortgage. She believed that interest rates would fall in the medium term and wanted to be able to benefit from a lower interest costs early on. She thought that the flexibility in reassessing her mortgage terms more regularly would be an advantage.

On the other side of town, Liam took a more patient approach. He chose a 5-year fixed-rate mortgage, embracing the stability and predictability it offered over a more extended period. He took comfort in knowing that his monthly mortgage payments would not change during the fixed-term, regardless of what happened with other interest rates.

As the years passed, Emma found herself renewing her mortgage fixed rate product not once but twice during the same time that Liam's was still around. The short-term fix that seemed like a boon initially began to reveal its complexities. With each renewal came the payment of new product fees and on each occasion she had added them into the mortgage loan balance.

Liam, in his 5-year haven, enjoyed the serenity of fixed monthly payments and no further product fees during his longer fixed term. The initial interest rates were slightly higher, but the absence of frequent product transfers spared him from the repetitive sting of additional fees.

As Liam's 5-year fixed-rate mortgage came to an end, he and Emma decided to compare notes on their home ownership journeys. What they discovered left them both astonished.

Emma, despite the allure of the lower rate of the short-term products, had paid a substantial sum in product fees over the same term as Liam. The frequent renewals had added to her mortgage loan balance, since she had taken the option to add the product fees to her loan balance, meaning she was paying interest on her mortgage product fees alongside the interest on her mortgage loans. Her loan balance was therefore higher than Liam's.

In contrast, Liam's 5-year fixed-rate choice proved to be a wise one. The stability and consistency in payments had not only provided peace of mind but had also resulted in lower overall product fees. Regardless of whether interest rates had gone up or down during that period, Liam knew that his mortgage payments would have stayed at a level that he could afford because as it was set against his wages at the time the loan was taken out.

The tale of Emma and Liam serves as a cautionary narrative for first-time buyers navigating the mortgage maze. Choosing a mortgage isn't just about the immediate gains; it's about considering the long-term implications. You need to consider the costs of switching mortgage products as part of your overall mortgage costs and the more frequently you switch, the more product fees you will pay. Mortgage brokers may similarly incentivised to suggest shorter term products, depending on how they are being remunerated. Something to also bear in mind.

As you embark on your own home ownership adventure, remember the tale of Emma and Liam. The mortgage you choose shapes the narrative of your financial journey. Consider the frequency of product fees, the stability of payments, and the long-term implications. Even if on the face of it a longer term fixed-term mortgage product seems more expensive, when you add all the costs and the frequency of re-fixing, it may actually end up being the cheaper option.

Emboldening you with education is our aim, and we hope this story illuminates the path to making informed decisions. So that you don't end up enduring a more costly journey.

Empowering you with knowledge, one financial consideration at a time! Which fixed-term product do you think is the better option for you?