Business | Money

On the Money: Are 10-year fixed mortgages a good idea?

 
Benefits: 10-year fixed-rate mortgages let borrowers be certain they can afford repayments for the length of the deal
Simon Read|Personal Finance Editor
12 May 2015

How does the idea of knowing exactly what your mortgage repayments will be for the next decade grab you?

It’s possible with 10-year fixed-rate mortgages, and there are several competitive deals around right now.

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 fixed-rate deal?

In theory, that means you will be able to rest assured 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 sitting 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.”

Two weeks ago, for instance, Co-operative Bank launched what could be the lowest two-year fixed rate ever at just 1.09%, although it does require a 40% deposit and comes with a whopping £1499 fee.

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Long-term fixed rates, by contrast, had been gradually drifting up until last week, when the Woolwich launched a 10-year fixed rate of 2.99% for those who can put down a 20% 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 will need to get out quickly.”

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

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, Hollingworth points out. “For instance, TSB and Newcastle building society have launched 10-year rates that only tie the borrower for the first five years,” he says.

Harris warns many borrowers are opting for shorter-term fixes. He says: “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.”