Best 10-year fixed-rate mortgages: should you lock into a long-term deal?


Updated on 06 February 2019 | 2 Comments

More borrowers are locking into cheap long-term fixed-rate mortgages as the products become even more flexible. Should you join them, or is it simply too expensive?

There’s been a huge rise in cheap 10-year fixed-rate mortgages as borrowers look to shield their finances from potential interest rate hikes and general Brexit-induced uncertainty.

There were only 16 such deals on the market back in 2014, but you can now pick from more than 150 products, according to financial data site Moneyfacts.

And they’re getting cheaper too: the average interest rate has plunged from 4.61% to 3.05% during that time.

At the sharp end, some rates are currently as low as 2.25% (compare rates here) if you own enough of your home or have a big enough deposit.

More homeowners signing up

Is a long-term mortgage right for you? (Image: Shutterstock)

Yorkshire Building Society (YBS) sent us a release yesterday citing a 44% increase in the number of borrowers taking out longer-term fixes.

“While homebuyers’ reluctance to purchase a house during these uncertain times is cooling the housing market, borrowers are rushing to secure new deals that will see them through Brexit and beyond,” says Janice Barber, mortgage manager at YBS.

YBS is admittedly one of the smaller players, but the fact so many lenders have launched deals stretching beyond five years is a good sign that there’s demand across the board.

So, are these people making the right call, or are they paying massively over the odds?

Well, the first and obvious point to make is that these deals offer far greater security. Knowing what your repayments will be for the next decade can make financial planning far easier.

Some people are happy to pay a premium for this.

No matter what type of deal you want, make sure you get the best rate available to you. Compare mortgage rates on loveMONEY when you have a spare minute.

How much cheaper are short-term mortgages?

At present, you can lock into a two-year fixed-rate deal below 1.4%.

On a £100,000 mortgage over 25 years, that works out to monthly repayments of just £395 compared to £436 on the best 10-year option, as you can see in the tables below.

That’s over £40 a month, almost £500 a year, cheaper.

However, as anyone who has spent any time shopping around for a mortgage will know, cheap deals usually come with massive fees as the lenders try to hide their profits away from the juicy headline rate.

Factor these in and the gap narrows a fair bit.

To try and provide a comparison between two-, five- and 10-year rates, we’ve put together the total cost of these deals over a decade (including product fees along with interest costs) on a £100,000 mortgage.

So in other words, we’ve assumed the borrower remortgages as soon as the fixed-period ends and is able to sign up to the identical product once more.

The end column in the table below shows the final bill for each, with the best 10-year deal costing around £2,500 more than the cheapest five-year, and £3,000 more than the top two-year option.

Compare mortgages with loveMONEY

Cheapest 10-year mortgages*

Lender Intro rate Fee LTV Monthly repayment 10-year repayments 10-year cost incl. fees
Coventry 2.25% £999 50% £436 £18,912 £19,911
Coventry 2.35% £999 65% £441 £19,791 £20,790
TSB 2.39% £995 £60% £443 £20,143 £21,138

Cheapest five-year mortgages*

Lender Intro rate Fee LTV Monthly repayment 10-year repayments 10-year cost incl. fees
Halifax  1.79% £1,495 60% £413 £14,910 £17,900
Halifax  1.83%  £995  60% £415 £15,255 £17,245

Cheapest two-year mortgages*

Lender Intro rate Fee LTV Monthly repayment 10-year repayments 10-year cost incl. fees
Lloyds 1.39% £1,499 60% £394 £11,484 £18,979**
Lloyds 1.43% £999 60% £396 £11,824 £16,819**

*Deals accurate as of 1 February 2019

**An earlier version of this article incorrectly stated that the total cost of the two cheapest deals worked out to £17,480 and £15,820 respectively.

Want to know what your monthly repayments will be, based on your mortgage size, rate and duration? This handy tool on the Guardian site will do just that (and show you how much interest youll pay).

Nothing stays the same

While the above tables aim to give you an idea of the premium you pay for a long-term fix compared to the cheapest deals currently on the market, it’s obviously a flawed comparison.

It’s highly unlikely that the identical products will be available two years from now, let alone five or eight.

That would be true at any given time, but is especially so in such volatile ones as these. What lies ahead really is anyone’s guess (be wary of those who claim to know otherwise).

That said, with rates remarkably low at present, they don’t have that far to fall. But there is there a lot of room in the opposite direction.

And if that does happen, a long-term fix could end up saving you a small fortune.

It all depends on your outlook for the next decade

Find a mortgage that suits you on loveMONEY's comparison site

How flexible is a long-term fixed-rate deal?

If you are interested in 10-year deals, it’s vital you consider whether you are comfortable operating with so many restrictions.

For starters, the Early Repayment Charges (ERCs) are usually massive – up to 6% on the deals mentioned above – and often only start reducing after five years.

So if you have to sell up because your circumstances have changed, you’re in for a hefty bill.

There’s also the issue of portability. Given it’s such a long-term fix there’s a decent chance you’ll want to move home.

The good news is many 10-year deals are portable, so as long as you’re still borrowing the same amount then you shouldn’t have issues.

It can get a bit messy if you need to borrow more, as most lenders will require you take out a separate mortgage on top of your existing deal, which means a lot more life admin.

As a final point on flexibility, remember that overpayments are your friend.

Not only will making extra payments on your debt save you a fortune in the long run it’ll also make your deal more flexible.

That’s because you can choose two ways that overpayments change your mortgage deal: either reduce the term of your mortgage, or the amount you have to repay each month.

Whether you're sold on the idea of a long-term fix or are happy to gamble on shorter-term deals, just make sure you don't sit on your costly SVR. Do that and you're guaranteed to lose no matter what happens next!

You can compare mortgages of all shapes and sizes in the loveMONEY comparison centre.

Comments


Be the first to comment

Do you want to comment on this article? You need to be signed in for this feature

Copyright © lovemoney.com All rights reserved.