Locking into a 10-year fixed-rate mortgage used to come at a considerable cost but as interest rates on shorter-term home loans have edged up, the price of a decade’s worth of certainty has fallen.
This week the best two-year fixed-rate mortgages had a rate of 2.54% for those borrowing 60% of the property’s value, while five-year deals were at 2.64% and the best 10-year rate was 2.73%.
“The margins between two-, five- and 10-year fixes have fallen, so it has become a much more favourable environment for people to consider a long-term deal,” says David Hollingworth of the brokers L&C Mortgages. “They’re not having to pay as big a premium for it.”
It is important not to make your decision based solely on the rate because it could turn out to be an expensive mistakeMark Harris of SPF Private Clients
On a mortgage of £180,000 over 20 years the monthly price difference between the cheapest two-year deal and the cheapest 10-year deal is £16.78. Over the first two years, that means paying a total of £403 more. But in year three, you could be better off. Hollingworth says he can see fixed rates “going through 3% sooner rather than later”. They could go as high as 4% by the end of the year.
Mark Harris, the chief executive of the mortgage broker SPF Private Clients, says there is currently “some incredible value” on offer in 10-year mortgages. However, he adds: “It is important not to make your decision based solely on the rate because it could turn out to be an expensive mistake.”
Fixed-rate mortgages generally have early repayment charges (ERCs) that have to be paid if you want to pay off the loan early. On the cheapest 10-year fixed-rate, available from Lloyds for those remortgaging and Halifax for homebuyers, the ERC is 6% of the loan until 2027. It then falls each year so that in the final year of the fixed-rate period it is 1%.
While you may have no intention of repaying the mortgage earlier, it might not necessarily be your choice – Hollingworth points out that if you move house, you might find you no longer qualify for the loan and need to repay it and take another.
View image in fullscreenDo you have no intention of repaying your mortgage early? Photograph: Robert Harding/Rex Shutterstock
However, at a time of rising costs, knowing how much your biggest monthly outlay will be for the foreseeable future has an appeal. Jonathan Harris, the managing director of Forensic Property Finance, says borrowers are choosing longer fixes in an attempt to ride out some of the considerable economic uncertainty, including rising energy bills.
“Almost every borrower we deal with wants at least a five-year fix, unless their circumstances dictate otherwise and they may need to move during that time,” he says. However, he says the suitability of a 10-year deal depends on the borrower’s life stage.
“A 10-year fix rarely suits a first-time buyer, particularly if they are buying with friends, as there is a strong chance they may need to move within the next decade,” he says. “On the other hand, a family with older children who are unlikely to need to move to a bigger house, may be happier about locking into a good rate for a decade as there is far less chance that they may need to move during that time.”
Fixing for the long term means not paying a new fee every couple of years as a deal expires, and the upfront fees tend to be no higher than on short-term mortgages. If 10 years sounds too long, there could be a happy medium, Hollingworth says – Yorkshire building society and Barclays have seven-year fixed-rate mortgages, at 3.29% and 2.89% respectively.
Fixed-rate mortgages tend to have an annual overpayment limit of 10% of your total mortgage balanceTrussle’s Amanda Aumonier
“The core markets are two and five years, then people leap to 10 years, but if you want to tailor it to the timeframe for your personal circumstances, there are other options,” he says.
Something else to bear in mind is overpayments, says Amanda Aumonier, the head of mortgage operations at the online broker Trussle. You may not plan to repay your mortgage early but if you know you will get a pay rise at some point, or maybe receive an inheritance, you might want to be in a position to clear some of your borrowing.
“Fixed-rate mortgages tend to have an annual overpayment limit of 10% of your total mortgage balance. Whereas if you’re on your lender’s standard variable rate or on a tracker mortgage, there does not tend to be a limit,” Aumonier says. A two or five-year fixed-rate mortgage will have the same limit but when the time comes to remortgage, you can make a lump sum payment and borrow less on the next loan.
Low 10-year fixed rates
Lloyds 2.73% up to 60% loan-to-value (LTV) – remortgage only. £995 product fee
Halifax 2.73% up to 60% LTV (purchase only). £995 product fee. 2.85% up to 60% LTV with no fee
Virgin Money 3.25% up to 75% LTV. £995 product fee
Barclays 2.82% up to 60% LTV. 3% up to 80% LTV. £999 product fee