New cheapest ten-year fixed rate mortgage charging just 4.29%

Neil Faulkner
by Lovemoney Staff Neil Faulkner on 08 January 2013  |  Comments 2 comments

Leeds Building Society is offering the cheapest ten-year fixed rate mortgage around. Mortgages this cheap are not once in a generation, but once in two generations!

New cheapest ten-year fixed rate mortgage charging just 4.29%

Leeds Building Society has launched a new ten-year mortgage costing 4.29% for those borrowing 75% of the value of their property. This offers long-term peace of mind at a price not that much higher than short-term mortgage interest rates.

Those borrowing 80% of the value of the property can still get a rate of 4.69%.

The small print

The deal costs £1,590 in fees and expenses, including most of the big costs: arrangement fees, booking fees, and my estimate for legal and valuation costs.

As with many mortgages, it's portable to a new property. You pay large early repayment charges (ERCs) if you settle your mortgage early, e.g. by selling your property, without buying another and “porting” your mortgage. You can overpay 10% of the outstanding balance each year without penalty.

The mortgage is not available in Northern Ireland.

Don't underestimate ten-year mortgages

There will have been few people in the past 40 years who managed to average this very low interest rate for a full decade. Using Bank of England data, I estimate that most people since the 70s will have averaged twice that or more, even if they shopped around and got the best rates.

Yes, over the past decade those choosing short-term interest rates will have done a lot better, but they will have done so with much greater risk and worry, since rates could have turned at any point. And they'd have paid more in arrangement fees to boot.

Mortgage borrowers have been blessed with very low interest rates in recent years, almost regardless of the type of deals they have chosen, but ten-year deals at prices such as this are not just once in a generation, but once in two generations!

In the tables at the end of this article, I have compared this Leeds deal to some more of the best long-term and short-term mortgages I could find. As you'll see, there are similar ten-year deals available, and a 25-year deal from Manchester Building Society too, which is my favourite deal at the moment (not that it's suitable for everyone obviously). These all cost between 4.29% and 5.24% per year, and with fees and expenses between £1,000 and £2,000.

Who needs to fix now?

Looking at the short-term deals in the second table, you'll see prices as low as 2.69% with around £700 of up-front costs. Remember, Leeds costs 4.29% and around £1,600 in up-front costs.

2.69% on a £100,000 mortgage would cost you more than £5,000 over two years. At 4.29%, it could cost you more than £8,000. You could even take the opportunity to overpay your cheaper mortgage, which will help you even further.

So, with short-term deals this cheap, you might wonder why you'd choose now to fix long-term. Or why not just choose First Direct's lifetime tracker mortgage (see my second table) which charges as little as 2.99%, but has no ERCs?

My first (just slightly flippant) response is that ten-year and 25-year fixed deals are cheaper now than they've been in many decades, so, if you won't fix for the long term now, when will you ever?

In contrast, HSBC's lifetime tracker should prove expensive in the long run, since it's pegged at 2.5 percentage points above the Bank of England's base rate. Historically, a good tracker has matched the base rate or even been below it.

Then you have to factor in the greater number of fees you'll have to pay when you remortgage during those ten years.

The main argument in favour of long-term deals

I also think many people believe that they can wait on their cheaper variable and short-term deals now, and beat mortgage lenders and other customers to a long-term fix later, in the belief they can grab a cheap long-term deal quickly when they see interest rates rising.

My main argument for longer deals is that I believe most borrowers overestimate their chances of succeeding with this strategy.

What I think they don't realise is that, as soon as there are signs of rising interest rates, thousands of people will try to move, just like them. Lenders will first lend out their available funds to the best of the applicants and/or the quickest applicants to apply. Your application may be near the bottom of the pile; you might have to make do with a much higher long-term fixed rate than you envisaged or stick to a roller-coaster of short-term or variable-rate deals.

It could become an unpleasant situation to be in and it could very easily become considerably more expensive for you than if you'd taken out a ten-year fix in the first place.

The downsides of long-term deals

Ten-year deals are not suitable for everyone. For example if you haven't bought your family home at a time when you're as confident as you can be that your future is stable, but instead in the belief that you can leapfrog every few years from one property to a bigger one (a dangerous game), it won't be the best bet.

Alternatively, it could prove a risky call if there's a good chance that you'll sell up completely within the deal period, due to high ERCs.

These sorts of mortgages are usually portable to another property, but porting mortgages has two potential downsides. Firstly, the lender might decline to port your mortgage to a new property if your financial circumstances have worsened, if it believes the property you want to buy is out of your price range, or if the lender tightens its acceptance criteria.

Secondly, you might have to buy a top-up mortgage from this or another lender to make up the additional cost of your next property. Small additional mortgages could potentially be more expensive than getting just one big, larger mortgage. I consider this a much smaller problem though.

Many experts (usually media spokespeople for mortgage brokers, who benefit from more commission if you remortgage every two years) explain that potential porting problems or changing circumstances are major concerns with these deals, but for many sensible borrowers I consider these risks to be a small price to pay for such great, long-term interest rates.

If you have sensibly bought your property for the long run, and you're paying it off over a decade or three, it makes sense to have deals lasting at least a decade, too.

Long-term fixed-rate deals

Mortgage

Loan to value*

Interest rate

Fees and expenses**

Notes

Leeds BS:

Ten-year fix

75% or

80%

4.29% or

4.69%

£1,590

Can overpay 10%pa of starting loan.

Manchester BS:

Ten- to 25-year fix

60% or

80%

4.99% or

5.24%

£1,570

Low early-repayment charges (0.75%-1.5%), which end inside 7 years.

Can overpay 10%pa of outstanding loan.

Woolwich:

Ten-year fix

70%

4.99%

£2,050

Can overpay 10%pa of outstanding mortgage.

Skipton BS:

Ten-year fix

60% or

75% or

85%

4.29% or

4.59% or

4.79%

£1,000

Can overpay 10%pa of the starting loan.

Co-op/Britannia:

Ten-year fix

75%

4.49%

£1,000

Can overpay 10%pa of outstanding mortgage.

*”Loan to value” (LTV) is the amount you are borrowing compared to the property price, e.g. if you buy a property worth £100,000 and pay a deposit of £20,000, you're borrowing £80,000 and your LTV is 80%.

**Fees and expenses include the mortgage lender's booking and arrangement fees, plus any valuation and legal costs, which are estimated where necessary.

The above table doesn't include offers that are exclusive to existing customers.

All of the deals mentioned come with hefty ERCs if you overpay too much or settle in full within the deal period, except the Manchester Building Society's deal, which has much more reasonable charges. The rest typically charge 6%-8% of the outstanding mortgage in the first few years declining to around 2%-3% in the final years.

You can greatly reduce the penalty for settling mortgages early by overpaying as much as you can before you settle up.

Short-term mortgage deals

Mortgage

Loan to value*

Interest rate

Fees and expenses**

Notes

First Direct:

Two-year fix

65% or

75% or

85%

2.69% or

2.99% or

4.49%

£720

Any-sized overpayments allowed, but normal penalties for full early repayment.

HSBC:

Two-year discount (variable)

60%

2.49%

£1,420

Can overpay up to 20% of your standard monthly payment.

Nationwide BS:

Two-year fix

60% or

70% or

75% or

80% or

85%

2.59% or

2.69% or

3.19% or

3.49% or

3.99%

£1,000

Can overpay up to £500pm.

First Direct:  Lifetime Tracker Mortgage

65% or

75% or

90%

2.99% or

3.29% or

4.79%

£720

Any-sized overpayments and no early-repayment penalties.

* and **: please see the notes under the table above.

Notice I have classified the First Direct Lifetime Tracker Mortgage as a short-term deal. This is because you're able to overpay or settle the deal in full at any time without penalty. Hence, it's as flexible as a short-term deal – indeed, more flexible. ING has a similar, but more expensive, mortgage.

All new First Direct mortgage customers have to open a First Direct current account too, which is a bit of a pain, but could be worth it if you're seeking the best short-term or lifetime tracker deals.

Get free mortgage advice from the lovemoney mortgage service

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 may revert to the lender's standard variable rate or a tracker 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.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

More on mortgages:

How a divorce affects your mortgage

The best new mortgages for 2013

Cut your mortgage costs in 2013

Overpay your mortgage and save thousands

Save £1,000+ by remortgaging

Interest-only mortgages: the banks that will still lend

Five mistakes that mean you'll get the wrong mortgage

Lovemoney Awards: ING Direct is your top mortgage provider

Is it worth going to a mortgage broker?

Why I'm paying a huge mortgage fee

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Comments (2)

  • markj9035
    Love rating 20
    markj9035 said

    I personally think that long term fixed are good at the moment but 10 years? So much can change in your life in that time. Just take a look back over the last 10 years of life and see how different it is and how massively different your personal circumstances are

    I just got a five year fixed at 3.44% through Virgin Money. It was a real pain to secure but worth I think. I already know that my life will probably change significantly in that time but I thought it was worth a punt for financial piece of mind.

    Report on 10 January 2013  |  Love thisLove  0 loves
  • Neil Faulkner
    Love rating 32
    Neil Faulkner said

    Hi markj9035

    Thanks for your comment. You're correct of course.

    Often when I write about 10 year+ mortgages I remind readers (although I think they can work it out for themselves) that circumstances can change an awful lot in 10 years, but that shouldn't put off people who feel as confident as they ever will be that their family (lifestyle and size) and finances are stable, and that their job is very secure or they're confident they can get an alternative job in the same area before their savings run out, if necessary.

    Yes, even then, some of those people who choose to take long fixes will lose out when they have bad luck, but most will benefit from assured interest rates, just one arrangement fee, and an interest rate that is going to average less than half the interest rate paid over the past 35-40 years.

    On the flipside, I reckon that proportionally more of these sorts of people who choose to take short-term mortgages will live to regret it.

    There are pros and cons to both longer AND shorter mortgages. The latter fact is often forgotten, especially since experts (i.e. mortgage brokers who are quoted in the press) push short-term deals so hard, for which they will get paid more commission, more frequently. I've lost count of the time I've read of brokers warning that long-term deals (10+ years) aren't for everyone, but I have never heard even one warn that short-term deals (1-3-year deals) aren't for everyone, despite the much greater interest-rate risks and uncertainty you face (and - on a less important note - despite the fact that, by one sensible measure, some short-term deals are actually relatively expensive on a historical basis*).

    10-year plus mortgages are very common in other countries for a good reason.

    Neil (article author)

    *See the sentence in my article about first direct's lifetime tracker being historically expensive for what it is. You'll find it two paragraphs before the sub-heading "The main argument in favour of long-term deals".

    Report on 11 January 2013  |  Love thisLove  0 loves

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