While interest rates are low is it better to take a short-term fixed mortgage or long-term one

Question

In the UK mortgage uinterest rates are historically low and I'm in a position where paying off a small mortgage in tens is financially viable. There are however two courses of action I could take:

1. Take a ten year mortgage, fixed for ten years, resulting in being mortgage free in the relatively near term and having a fixed, predictable and affordable monthly payment for that term.

2. Take a regular 25 year mortgage, fixed for five or ten years, with significantly lower payments (~£200 or more).

What I can't quite figure out is the risk, having not seen full economic cycles or mortgaged before, like my parents have, and overall cost when inflation is taken into account which seems related to risk. I am not expecting interest rates to fall further, which I am aware would make the first option more expensive.

By better I mean less risky and / or cheaper taking inflation into account. An answer that concludes that 2 is best if I do something sensible with the saved money is both acceptable and interesting.

Answer 1

Interest rates are at historic lows. In my opinion they can only go up from here. With that in mind, it is best to lock in interest rates now.

I would only take an adjustable rate if I expected my personal income to increase in excess of the increase in interest rates.

I hold that the recent technology of fracking has driven down the price of energy. I also believe that this is a short term situation and energy prices will return, and have already begun to do so. With the price of energy going up, inflation will return.

Answer 2

The financially best choice depends on which has a lower interest rate and what your other debts are.

• If you have significant other debts with a higher interest rate, it may make good sense to sign up for the longer-term loan and use your extra money to pay those down first. Then pay down your mortgage with large payments.

• If you don't have significant other debts, then it is likely a good idea to take a shorter term loan because those tend to have lower interest rates.

In either case, remember that the required loan payments are the minimum payments. You can always pay more, and in many cases you should. The objective here is to pay as little interest over the course of your life as is feasible.

I don't think it makes too much sense to gamble on whether or not interest rates will rise in the future. They may or may not over the life of your loan and you are not in a position to know which. They are low now, so they can be compared to your existing loans usefully. That is enough information to make rational decisions today.