With thousands of products available in the market, choosing the right mortgage deal can be tough. Even if you decide that you prefer a fixed-rate deal, you’ve then got to work out how long you should fix your repayments for.
With longer-term fixed rates becoming increasingly popular, we look at how you now have a wider choice of seven-year and ten-year fixed rates, and the pros and cons of this type of deal.
Big rise in the number of ten-year fixed-rate deals in the last year
In the last year, the choice of long-term fixed-rate mortgages has increased significantly. While seven-year fixed rates are relatively uncommon, in the last 12 months the number has risen from 10 to 26 – an increase of 160%.
Similarly, the choice of ten-year fixed-rate deals has also risen sharply. Moneyfacts reports that there are now 178 such deals available today compared to 128 in May 2018 – an increase of 40%.
The increase in choice has also driven down the cost of these products. The average cost of a seven-year fixed rate has fallen from 2.73% to 2.62% in the last year, while the average cost of a ten-year fixed deal has fallen from 3.14% to 3.04%.
So, there’s more choice than a year ago, and the average rate has fallen. However, it’s important that you understand the pros and cons of this type of deal before you commit.
Advantages of a long-term fixed-rate mortgage
The main advantage of a long-term fixed-rate mortgage is that you’ll know exactly what your repayments will be for a fixed period. Your mortgage payments won’t change for seven or ten years, irrespective of what happens in the economy or whether the Base rate rises or falls.
This means that if interest rates rise, your repayment won’t change, and you’ll have the peace of mind of knowing what your mortgage costs for a set period.
Committing to a long-term fixed rate also means that you could save on the cost of remortgaging.
If you took a shorter deal – perhaps a two or three-year fixed rate – then you may have to act more often to avoid reverting to your lender’s higher Standard Variable Rate. You will often find that there are fees and costs for switching (legal or valuation fees, arrangement fees) and so if you don’t have to remortgage every couple of years, you benefit from not paying these fees.
You’re also protected if lenders change their criteria during the term of your mortgage. If lenders tighten their affordability criteria, it means you might not be able to switch onto a lower rate. If you have taken a seven or ten-year deal, you don’t have to worry about this – at least until your fixed rate ends.
Disadvantages of a long-term fixed-rate mortgage
One of the main disadvantages of a longer-term fixed rate is that your mortgage payments may be higher, at least initially. Choosing a seven or ten-year fix means you’ll generally pay a small premium for the stability and security of a long-term deal.
For example, This Is Money reports that the average two-year fixed-rate mortgage deal in May 2019 stood at 2.49%. The average ten-year fixed rate was at 3.04%.
On a £200,000 repayment mortgage over 25 years, taking the short-term fixed rate would cost around £896 per month, compared to the £953 you’d pay on the ten-year deal. The two-year product saves you around £57 per month, meaning that you’d pay £684 a year extra for the security of a long-term deal.
In addition, committing to any fixed rate means you could also end up paying more than you need to if interest rates were to fall.
When considering a long-term fixed rate, one of the main considerations should be whether you’re likely to pay off some or all of your mortgage within the fixed period, or whether you’re likely to move home.
This is because most seven and ten-year deals come with high Early Repayment Charges (ERCs). Your lender will charge this fee (typically a percentage of the amount you repay) if you decide to end the deal early, for example by selling your home and repaying the mortgage or paying back a substantial lump sum.
These fees can often run into thousands of pounds so you should be as sure as you can that you’re not likely to want to redeem part or all of your mortgage.
Most lenders offer deals that are ‘portable’, meaning that you can take the interest rate with you if you move home. However, there are conditions for this, and if your circumstances have changed, there’s no guarantee that your lender will approve your new mortgage, meaning you could end up paying the ERCs.
You’ll also face these charges if you want to pay off a lump sum – for example, through an inheritance. Many lenders allow you to pay off up to 10% of your outstanding mortgage balance each year without penalty, but pay any more than this within your fixed rate period and you could be hit with a charge.
Finally, you’ll typically get a better mortgage deal if your loan-to-value is lower. If the value of your home increases during your period of ownership, you may be able to take advantage of a lower rate by remortgaging to another deal. However, if you’re committed to a long-term fixed rate, you are unlikely to be able to remortgage without paying significant early repayment charges.
If you’re looking for advice on the right mortgage deal for you, get in touch. We can help you find the right lender and the most appropriate product for you. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.