Fix your mortgage for a decade

by John Fitzsimons on 10 June 2010  |  6 comments
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Forget about trackers – fixing your mortgage rate for a decade is the most sensible thing you can do.

When it comes to mortgages, I can sound a bit like a broken record. Yes, Bank Base Rate is at a record low, and is likely to stay low for a little while yet, and that makes a tracker mortgage mightily attractive. After all, not only do you benefit from lower mortgage repayments, but if you’re clever and overpay, you build up your equity stake that much quicker, slashing years off your mortgage, as well as saving thousands in the long run on interest payments.

However, I have constantly made the case for instead going for a fixed-rate mortgage. And not just a two-year deal that you will have to remortgage from in two years but a longer term deal of five years.

Fixing for a decade

However, the arguments for fixing for an even longer period are just as strong, with new market-leading mortgages launched last week for those tempted to fix their rate for an entire decade!

Accord Mortgages, the branch of Yorkshire Building Society which only deals with mortgage brokers, has put out a range of new mortgages, but the ones that have caught the eye most are the 10-year fixed rate mortgages on offer.

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All of the deals require a deposit of at least 25%. The first mortgage offers an interest rate of 5.24%, with booking and completion fees of £1,995, while the second deal will set you back just £995 but you will pay slightly more interest, with a rate of 5.44%.

The third mortgage, at an interest rate of 5.54%, will again set you back £995, but comes as an offset mortgage, allowing you to use your savings in a clever way which can slash years and thousands of pounds in interest payments off your mortgage.

The secure option

So what are the benefits of going for a long-term fixed rate mortgage?

First of all, there is the security. If you go for a ten-year fixed rate mortgage, you know that whatever happens with Bank Base Rate, you will be shelling out the exact same amount on your mortgage each and every month.

No payment shocks

You are also guarding yourself against future payment shocks. Bank Base Rate can only go one way – up. And that means that interest rates on fixed rate deals are likely to rise as well.

So if you fix for the long term now, chances are you will save money in the long run – if you fix for two years, you will get a cheaper initial rate, but in two years’ time when you need to remortgage, not only will you probably face an increase in your monthly payments due to the higher rates on offer, but you will also have to fork out on new product fees.

The equity shock

What's more who is to say what house price fluctuations we may see in the next couple of years?

If house prices fall 20% in the next few years (something I can't see happening but I know many of you disagree with me), this could drastically alter the level of equity you hold in your home, and therefore what mortgages are even available to you when you come to remortgage?

This simply isn't a problem with a long-term fixed rate deal, as you won't be shopping around to remortgage every couple of years.

Paying a premium

However, such a long-term commitment is not for everyone, and there are a few potential downsides to taking such a long-term deal.

Firstly, there is the premium that you pay for that long-term security. Sure, you know how much you’ll be shelling out each month for a decade, but that doesn’t mean it is affordable.

When you consider that the cheapest five-year fixed rate with a 25% deposit is 4.24% from Britannia, you’re paying an extra 1% interest for the sake of that extra five-years. That could easily push it into the realms of unaffordable (not to mention the product fee is £1000 cheaper on the Britannia deal too).

The early repayment charge

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The problem is that getting out of the mortgage can be exceptionally expensive – with the Principality ten-year fix (detailed in the table below) for example, you will have to shell out 8% of the remaining mortgage to get out of the deal if you want to leave at any point in the first ten years.

If you have £150,000 outstanding on your mortgage, that’s a £12,000 charge!

Going portable

Thankfully many lenders are wise to the potential for this happening, and so have introduced a portable element to the mortgage. This means that should you choose to move during the ten years, you can take the mortgage with you and extend it whether in size or length to cover the purchase of the new property.

However, not all long-term deals will offer this feature, so be sure to talk it through with your broker or the lender involved to ensure that your bases are covered should your circumstances change.

The top 10 ten-year fixed rates

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.