Is a 10 year mortgage deal a fix too far?

A cut-price deal for a decade-long home loan - where's the problem? Only, says Simon Read, that circumstances can change and it won't be easy to get out

Simon Read@simonnread
Friday 08 May 2015 23:12
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix

Should you be fixing your mortgage for the next decade? A new market-leading low rate – less than 3 per cent for 10 years – was launched this week by the Woolwich. With that offer, the mortgage lender, part of Barclays, has put the focus back on longer deals.

But is it a good idea to lock yourself into a loan for such a sustained period? Or would you be better off switching to a shorter-term deal?

The advantage of fixed-rate mortgages is knowing how much your monthly repayments will be for some time into the future.

In theory, that means you will be able to rest reassured that your mortgage will be affordable for the length of your fixed deal.

In practice, it could mean you end up paying more than you need to if the rate at which you fix remains higher than standard rates for any length of time. However, with the Bank of England's base rate remaining at record lows for six years now, it looks as if the only way that mortgage rates will go is up. The question is when?

"As the base rate has been at such a low for so long, there is no doubt that some borrowers will have become complacent about the potential for a rate rise," warns David Hollingworth, associate director at the broker London & Country Mortgages.

"Even though it currently looks like a rise could be some way off yet, it does mean that lenders are able to offer some outstanding fixed-rate deals in the meantime."

Last week, for instance, the Co-operative Bank launched the lowest two-year fixed rate ever at just 1.09 per cent, although it does require a 40 per cent deposit and comes with a whopping £1,499 fee.

Long-term fixed rates, by contrast, had been gradually drifting up until this week, when the Woolwich launched a 10-year fixed rate of 2.99 per cent for those who could put down a 20 per cent deposit.

"The steady stream of new 10-year fixed-rate deals gives borrowers more choice than ever," says Charlotte Nelson at the data firm Moneyfacts. "These deals are, however, often accompanied by hefty redemption penalties over the fixed-rate period, so borrowers tempted should look at all aspects of the mortgage and evaluate whether it is likely they we need to get out quickly."

The Woolwich deal, for instance, comes with an early repayment charge of 6 per cent for the first seven years, falling to 3 per cent in the last three.

Mr Hollingworth says borrowers must bear in mind that most deals require them to be tied in for the full 10 years. "It's important to weigh up whether you may need more flexibility further down the line," he advises.

Mark Harris, chief executive of SPF Private Clients, also warns borrowers to be careful before signing up for a decade. "Circumstances can change dramatically during that time, so although in theory such a loan is 'portable' and you can take it with you if you move, that still requires the borrower to fit the lender's criteria at that time – and if not, you may be refused."

There are decade-long deals with fewer restrictions, points out Mr Hollingworth. "For instance, TSB and Newcastle building society have launched 10-year rates that only tie the borrower for the first five years," he says.

But many borrowers are opting for shorter-term fixes, says Mr Harris. "Two and five-year fixes remain the most popular choices, particularly the latter, which give medium-term security while costing not much more than a two-year deal," he points out.

"With five-year fixes dropping recently – below 2 per cent for those with 40 per cent deposits – it is easy to see why borrowers are so keen to snap one up."

Case study: 'Your mindset changes but I'm very happy with the deal'

Martyn Bridges and his family are happy to have been able to secure a 10-year fixed-rate mortgage when they bought their new home.

"We've moved from an old period property to a lower- cost house," he says. "Our 11-year-old disabled son starts secondary school in September, so we wanted to move nearer his school.

"We only wanted a mortgage for 10 years as I'm 52 now and want to be mortgage-free by the time I'm 62 so that there are no debt worries as I start to think about retirement."

He works for a boiler manufacturer – as does his wife – and the key thing for the couple when fixing was future affordability.

"We took a £170,000 loan with Santander at just 2.94 per cent, which is very affordable for us," says Martyn, who lives in Bewdley near Worcester.

"Your mindset changes a little bit when you lock into 10 years, but as I suspect that variable rates will climb over that time, I'm very happy with the deal."

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