Locking in a 10-year fixed-rate mortgage came at a considerable cost, but as interest rates on short-term home loans rose slightly, the price of a decade of certainty fell.
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 offers were at 2.64% and the best rate over 10 years was 2.73%.
“Margins between two-, five- and ten-year solutions have shrunk, so it’s become a much more favorable environment for people to consider a long-term deal,” says David Hollingworth of brokers L&C Mortgages. “They don’t have to pay such a high premium for it.”
On a £180,000 20-year mortgage, the monthly price difference between the cheapest two-year contract and the cheapest 10-year contract is £16.78. In the first two years, that means paying a total of £403 more. But in third year, you could be better. Hollingworth says he can see fixed rates “going through 3% sooner rather than later.” They could rise to 4% by the end of the year.
Mark Harris, managing director of mortgage brokerage SPF Private Clients, says there is currently “incredible value” on 10-year mortgages. However, he adds, “It’s important not to make your decision based on the rate alone, as this could prove to be a costly mistake.”
Fixed-rate mortgages usually have a prepayment charge (ERC) that must be paid if you want to pay off the loan early. On the cheapest 10-year fixed rate, available from Lloyds for repayers and Halifax for homebuyers, the ERC is 6% of the loan until 2027. It then decreases each year so that in the last year of the fixed rate period, it is 1%.
Although you may not intend to pay off the mortgage sooner, it may not necessarily be your choice – Hollingworth points out that if you move, you may no longer qualify for the loan and owe pay it back and get another one.
However, in a time of rising costs, it’s worth knowing what your biggest monthly expenses will be for the foreseeable future. Jonathan Harris, managing director of Forensic Property Finance, said borrowers are choosing longer-term solutions to try to weather some of the considerable economic uncertainty, including rising energy bills.
“Nearly all borrowers we deal with want a minimum five-year solution, unless their circumstances dictate otherwise and they may need to relocate during that time,” he says. However, he says the suitability of a 10-year contract depends on the life stage of the borrower.
“A 10-year solution is rarely suitable for a first-time buyer, especially if they’re buying with friends, because chances are they’ll have to move within the next decade,” he says. “On the other hand, a family with older children who probably won’t need to move to a bigger house, may be happier to lock themselves into a good rate for a decade because there’s a lot less likely she will need to move during this time.”
Securing for the long term means not paying new fees every two years when a deal expires, and upfront fees tend to be no higher than on short-term mortgages. If 10 years seems too long, there could be a happy medium, says Hollingworth – Yorkshire Building Society and Barclays have seven-year fixed rate mortgages, at 3.29% and 2.89% respectively.
“The main markets are two and five years, then people move up to 10 years, but if you want to tailor it to the time frame of your personal situation, there are other options,” he says.
Don’t forget about overpayments either, says Amanda Aumonier, head of mortgage operations at online brokerage Trussle. You may not plan to pay off your mortgage early, but if you know you will get a raise at some point, or you may receive an inheritance, you may want to be able to repay part of your loan.
“Fixed rate mortgages generally have an annual overpayment limit of 10% of your total mortgage balance. Whereas if you’re on your lender’s standard variable rate or a follow-on mortgage, there’s usually no limit,” says Aumonier. A two- or five-year fixed rate mortgage will have the same limit, but when it comes time to remortgage, you can make a lump sum payment and borrow less on the next loan.
Low 10-year fixed rates
Lloyd’s 2.73% up to 60% loan to value ratio (LTV) – mortgage only. £995 product fee
Halifax 2.73% up to 60% LTV (purchase only). Product fee of £995. 2.85% up to 60% LTV free of charge
blank silver 3.25% up to 75% LTV. £995 product fee