Halifax and Lloyds Bank became the latest lenders to launch 10-year fixed-rate mortgages last month, and longer fixes are likely to be increasingly under the spotlight after the recent decision to raise the base rate to 0.75%. If you're considering fixing for such a long term, here's what you need to consider.
In recent years, two-year mortgage deals have been the most popular, yet with the historically low interest rates rising, there has been a gradual shift towards longer fixes. After the base rate rose on 2 August from 0.5% to 0.75%, mortgage rates are likely to rise in turn, meaning those who have fixed for longer could be at an advantage.
Deciding how long to fix for is a game of weighing up risks: either fix for a shorter term at a lower interest rate and accept the possibility that rates will have risen by the time you remortgage, or take a long-term fix at a higher rate and enjoy the security of knowing what your rate will be – although you could end up paying more if rates drop or stay level over the 10-year term. It all depends on your personal situation, so consider the options carefully.
What are the pros and cons of 10-year fixes?
In general, longer fixes come into their own for those who are settled and looking for long-term security. If you're a first-time buyer who will be looking to move up the property ladder in the coming years, have a growing family or are unsure about your future plans, this option is probably not for you. While some mortgage deals are portable, so can be taken with you if you move house, this can have its own complications.
Pros of a 10-year fix:
- Avoid extra mortgage fees. Regularly switching deals means fees can add up. If you take out five consecutive two-year deals over a 10-year period, you'll be paying any fees five times over, potentially setting you back £8,500 if you pay the £1,700 fee on the current lowest-rate two-year fix, up to 60% loan-to-value (LTV). The LTV is the percentage of the property value you're loaned as a mortgage – in other words, the proportion you're borrowing.
Meanwhile, the current lowest-rate 10-year fix for LTVs of 60% has no set-up fees at all, and of course the deal would last for the full 10 years – an instant £8,500 saving on fees (though the rate is higher). For more info on the increasing number of no-fee mortgages, see our Four in 10 mortgages are now fee-free MSE News story.
- Beat potential interest rate hikes. More base rate rises are predicted for the coming years, and a long-term fix guarantees that you can keep your existing mortgage rate even if rising interest pushes up mortgage prices in general – providing peace of mind in an uncertain climate.
- Your mortgage deal won't be affected by fluctuating house prices. In general, you'll be able to get a better mortgage deal if your property has a lower LTV rate. If you're on a shorter fix and house prices fall before you remortgage, your LTV will increase and you may not be able to access the top mortgage rates. A longer fix protects you against short-term dips in the market – although of course, if house prices rise steadily you won't be able to capitalise on this during the fix.
- You're protected if lenders' criteria change. If mortgage providers tighten their affordability criteria in the coming years, you could find yourself unable to remortgage with a new lender at a competitive rate. A longer deal will insulate you against this, at least until the fix ends.
- You'll only be credit checked once. Every time you apply for a new mortgage deal, you'll face a thorough credit check – so in the months before remortgaging, it's best to hold off on applying for other credit products to avoid bringing down your score with multiple applications close together. So if you're remortgaging every couple of years, you'd need to factor this into your other financial planning. With a longer fix, you'll be less restricted in applying for other products.
Cons of a 10-year fix:
- Your monthly payments will be higher, at least at the start. Your interest rates will be higher on a 10-year fix than a shorter-term deal, pushing up your monthly repayments: the lowest rate for a 10-year fix (60% LTV) is 2.49%, while for a 2-year fix (60% LTV) it's 1.35%.
- You could pay a penalty if you move house. If you're planning to move in the next 10 years, early repayment charges could be as much as 7% of your outstanding mortgage. While some providers offer a 'porting' facility which lets you take your mortgage with you when you move, this is subject to strict approval and affordability checks so there's no guarantee you'd be able to move penalty-free (and you could run into problems if you need to upsize and your provider won't offer you top-up borrowing).
- You'll be hit with extra charges if you pay off the mortgage early. If you want to make substantial overpayments on your mortgage, or you have a windfall over the next 10 years – for example, through an inheritance – and want to pay off your mortgage in full, you'll again face hefty early repayment charges.
- You could end up overpaying if you have a high LTV. If your LTV is over 60% when you take out your mortgage deal, a 10-year fix will lock you into the higher rates associated with higher LTVs. So if over the 10 years you repay a chunk of the mortgage, therefore bringing down your LTV and qualifying you for more competitive deals, you'll still be stuck paying a pricier rate until the fix ends.
- You could end up paying more if interest rates don't rise. If interest rates fall or stay steady over the next 10 years, you could look back at the end of your term and realise it would have been cheaper to take multiple shorter fixes. However, committing to a rate you know you can afford could still be preferable to taking the risk of a sharp rate increase.
Which 10-year fixes are available?
While Halifax and Lloyds are the most recent providers to launch a 10-year fix, they're not the cheapest available – Halifax offers 2.69% (up to 60% LTV) or 2.89% (up to 75% LTV), while Lloyds offers 2.82% (up to 60% LTV) or 3.04% (up to 75% LTV), all with set-up fees of £995.
As of 14 August, the market leader is Coventry Building Society, which offers 2.39% with £1,007 set-up fees for LTVs of up to 50%. For those with higher LTV rates, HSBC offers 2.49% with no set-up fees (up to 60% LTV), while Coventry BS offers another 10-year fix at 3.15%, with set up fees of £1,019 (up to 90% LTV). For full info on the products available, check our Mortgage Best Buys tool.
Initial costs of two-year vs 10-year fixes:
If you had mortgage debt of £120,000 on a £200,000 property, and took out the top two-year fix on the market (1.35% from Yorkshire Building Society, with set-up fees of £1,700), your monthly repayment would be £478, amounting to a total cost of £11,479 over the two years of the fix.
Meanwhile, if you opted for the top 10-year fix on the market for the same mortgage debt, your monthly repayments would £538, while your total payments over the first two years of the fix would be £12,907. However, while two-year fixes are cheaper initially, if you continued to take out two-year fixes over 10 years the further set-up fees and potential rises in interest rates could offset this early saving.
Other shorter fixes are available
Of course, two-year and 10-year fixes aren't the only options available. If you're looking for the security of a longer guaranteed rate but don't want to commit to a full decade, five-year fixes can be a good middle ground. The current market leader is from Skipton Building Society at 1.83% with £2,001 set-up fees, available for mortgages with LTV rates of up to 60%. For higher LTVs of up to 90%, Barclays offers 2.38% with set-up fees of £1,034.