At the start of the year, a popular topic of discussion among real estate experts was whether fixed rate mortgage rates would fall below 4%.
They didn’t have to wait long, as in the first five weeks Virgin Money released one at 3.99% – although anyone who takes it out will have to fix it for a decade.
The rapid rise in interest rates following the fall mini-budget pushed the average of two- and five-year fixed rates to over 6.5% in October.
However, rates have since fallen steadily despite successive increases in base rates by the Bank of England.
Mortgages with a ten-year term may offer benefits to those who have found their ‘forever home’
There has yet to be a two- or five-year fixed mortgage with a rate below 4% this year. In February, the average two-year fixed mortgage rate was 5.44% and the five-year rate was 5.2%, according to Moneyfacts.
But looking at the cheapest rates on the market, some lenders are starting to get close to breaking the 4% barrier.
Lender Platform currently offers a five-year fixed deal at 4.16% for those with a 40% deposit, while the Newcastle Building Society has a two-year fixed deal at 4.35%.
And the second-best ten-year solution after Virgin is Halifax, offering 4.04%.
While brokers expect mortgage rates to continue falling despite the Bank of England signaling that the base rate has yet to peak, there is a general consensus that mortgage rates will stabilize somewhere below 5%.
Five-year mortgage swap rates are currently hovering around 3.5%, suggesting this is where banks think interest rates will be in five years.
But as we saw in the fall, events can change quickly and no one can ever say for sure where rates will be at some point in the future.
So if you’re thinking of remortgaging or buying a house, is it worth going for a 10-year contract?
Falling rates: fixed rates have been steadily falling since the peak in October last year
10-year mortgages: the advantages
The strongest argument for fixing your mortgage for 10 years is the certainty it provides.
If your current home is going to be your “forever home” and you want to put a plan in place to pay off the mortgage by a certain date, a ten-year solution gives you the flexibility to plan for the long term.
It also insulates you from any future rate hikes. For the next year or so, many brokers say interest rates between four and five percent will be the “new normal” – so this might allow you to lock in your mortgage at that kind of level.
However, it is more difficult to predict where mortgage rates will go further in the future. If they fell, you’d be forced to pay more than the odds and couldn’t exit the mortgage without paying a prepayment charge.
This may be easier to swallow for those who don’t have much time left over the term of their mortgage and are paying less each month.
“Binding to a 10-year term will only make sense for those who are coming to the end of their mortgage and want the security to know what they are paying for and not have to review it,” says Nicholas Mendes, technical director of mortgages at John Charcoal.
Security: Securing your mortgage for a longer term adds certainty to your financial planning
Ten-year mortgages: the disadvantages
For first-time buyers or those on the second rung of the real estate ladder, a cheap ten-year fixed rate may seem attractive.
But for now, the Virgin Money deal and the Halifax rate – the second-cheapest – only affects those with large or medium deposits.
For borrowers who need more than 75% loan-to-value, the price of a 10-year solution comes in at around 4.82%, more expensive than most shorter fixed-term agreements.
The product’s lack of flexibility could also have an impact on borrowers’ decision-making.
Having kids or having to move for a job can change what you want from your property, and a decade is a long time to commit to a home.
Some long-term transactions allow you to transfer the mortgage to a new property, but it will still have to meet lenders’ requirements and therefore cannot always be secured.
If homeowners have a sudden change in circumstances, like a big pay raise or job loss, they could find themselves trapped in exorbitant prepayment charges to evade the loan.
Riz Malik, Director of R3 Mortgages, says: “It can be tempting to consider fixed rates for the long term and many people did this last year when rates were volatile.
“However, these products usually come with a tiered or lump sum prepayment charge. This means that if your situation changes, you might have to pay a big penalty to get out of the deal.
Ten-year fixed rate mortgages often have hefty prepayment charges that trap borrowers
The second big risk is that the rates drop significantly and that you end up overpaying your mortgage, compared to those who are able to take out new loans.
Although fixed rates on mortgages are currently expected to be between 4% and 5%, some experts expect prices to fall until 2023 and until the year next.
This makes it more advantageous to fix for a shorter period, giving you the flexibility to switch if rates drop.
“The price war is well and truly in full swing, with lenders constantly looking to compete at the moment as they fight for share of mortgages in a calmer mortgage market,” says Jamie Lennox, director of Dimora Mortgages.
“People will have to think carefully before staring for such a long time.” The promising outlook is that it may not be that long before other lenders join Virgin Money with rates below 4% and we may even see shorter-term solutions follow suit.
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