Thinking about fixing your mortgage for 10 years or longer? Here are the pros and cons
More and more 10-year fixed mortgage deals are coming to the market, with First Direct becoming the latest to launch a product. Fixing for a decade can be done for as little as 3.33% right now and is becoming more appealing as the Bank of England base rate continues to rise. But there are pros and cons to doing so – here's what to watch out for.
Just months ago, homebuyers and remortgagers were spoilt for choice when it came to mortgages. Sub-1% fixed rate deals were commonplace, with rates as low 0.79% for some.
Fast forward to now – with the Bank of England having hiked the base rate five times in six months to stand at 1.25% – the cheapest two-year and five-year fixes are suddenly 2.85% and 2.99% respectively.
While interest rates on mortgages across the board have been going up, they haven't been doing so quite as dramatically on 10-year and lifetime fixes (mortgages that are fixed for the duration of the term, such as 25 years). Currently homebuyers can fix for a decade with Halifax at 3.33%, or, bizarrely, even cheaper for life with Kensington Mortgages at 3.1%.
What are the PROS of fixing for 10 years or longer?
Here are some of the advantages of fixing for a decade or longer:
- Protection against potential interest rate hikes. The main reason to fix a mortgage is to lock in "today's" interest rate for a set-period, such as for two, five, 10 years or longer. Once you're locked in, it doesn't matter whether interest rates elsewhere go up or down, your interest rate will stay the same for the length you've locked in. In a climate of rising interest rates, with further hikes expected, some people are locking in for longer – in other words, to protect themselves against this.
See our Which mortgage to choose? guide for a full rundown of how a fixed-rate mortgage works compared to a variable rate mortgage.
- You'll likely pay less in fees in the long-term. Every time you set-up a new mortgage you have to pay fees to do so; the biggest typically being the arrangement fee. This can set you back anything from £100s to £1,000+. If you had a 25-year mortgage, and you were to remortgage five times over that period, the set-up fees can add up. But if you're fixing for 10 years, or even for life, you'll pay fewer set-up fees.
- 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 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.
Both Kensington and Halifax allow also overpayments on their respective deals. See the advantages of this in our Should I overpay my mortgage? guide.
What are the CONS of fixing for 10 years or longer?
Here are are some of the disadvantages of fixing for a decade or longer:
- Your monthly payments will be higher as you'll be on a higher interest rate. You literally pay a price for fixing for 10 years or longer, as interest rates on shorter fixes are almost always lower than those on longer fixes. Having said that, the gap between rates on shorter and longer fixes is really small right now. The cheapest two-year fix and five-year fix at 60% loan-to-value is 2.85% with Post Office and 2.99% with Dudley Building Society respectively.
- You can't always take these deals with you if you move. Some mortgage deals are portable, meaning you can take them with you – penalty free – if you move to another property. This is a good feature if you believe you will want to move in future. Halifax's 10-year fix is portable, but only if you're not borrowing any more money. However, Kensington's lifetime fix is not, meaning you will have to pay an early repayment charge (see below for more) if you decide to move. For more on how porting works, see our Port a mortgage guide.
- Early repayment charges apply. Lenders tend to levy an early repayment charge (ERC) if you need to repay your mortgage before the term ends; either in full or by more than the overpayment allowance.
Both Halifax's 10-year fix and Kensington's lifetime fixes come with ERCs, both of which last for the duration of the mortgage. Halifax's ERC range between 1% and 6%, while Kensington's range between 2% and 6%. The longer you've got left on your deal, the bigger the ERC. However, Kensington's ERC doesn't apply if you repay the loan in full using your own funds, or from the proceeds of selling the property. So it only applies if remortgage with another lender.
See our Remortgaging costs guide for more on how ERCs work.
- You could end up paying more if interest rates don't rise. If interest rates fall or stay steady over the next few 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.