In turbulent times its human nature to seek shelter. With interest rates increasing for the second time in a row and further rate rises on the cards, many of us are facing that turbulence right now.
So it’s no wonder we are also eyeing up the potential shelter offered by the 10-year fixed rate mortgage.
These are mortgages which provide customers with a fixed rate of interest on their repayments, for a full decade. So, if your rate is fixed at 2.2% for example, it’ll stay that way until 2032 – no matter what happens to interest rates.
For some time now the traditional two-year fixed rate has been a go-to choice for borrowers. It provides certainty for a decent period of time but has a bit of flexibility too.
Five-year fixes have also proved popular over the last few years. The rates tend to be a little higher than their two-year cousins, and they may not be quite as flexible. But for customers who know they are unlikely to move they provide assurance without the hassle of remortgaging every two years.
But following last week’s Bank of England interest rate rise to 0.5% there have been predictions the rate is going to continue following this upward trend for some time. Forecasts suggest they could reach 1.5% by the middle of 2023. And borrowers have been getting jittery.
Mortgage data business, Twenty7Tec, revealed even when speculation about the Bank of England base rate started to mount at the end of last year, interest in 10-year fixed rate mortgages from consumers doubled.
Nathan Reilly, direct of lender relationships at Twenty7Tec, said: “We’ve certainly seen longer-term products receiving more attention as customers consider the benefits of more certainty, particularly whilst interest rates remain low.”
Naturally, lenders have clocked on. According to Moneyfacts.co.uk, at the start of January there were 173 10-year fixes compared to 127 at the same time last year.
Last week things really started to get competitive. Leeds Building Society launched two 10-year fixes. One had a rate of 2.08%, which is for customers who need a loan for 65% of their property’s value. The other, for borrowers who needed a 75% loan, has a rate of 2.14%.
Lloyds went even further and offered a 10-year fix for 1.66% for those who need to borrow 60% of their property’s value and Halifax are now offering 1.68% on a similar deal.
With plenty of options, and some good rates, what’s not to like? As with all mortgages the 10-year fix has its pros and cons and is also more likely to suit certain homeowners more than others. Let’s take a look…
What are the benefits?
As we’ve already mentioned, certainty is one of the main ‘pros’ when it comes to the 10-year fix. No matter what happens to interest rates over the next decade, you can be assured your rate will stay the same.
But that’s not all, you will also be protecting yourself in case providers’ lending criteria changed or if your circumstances altered within the 10-year timeframe.
The hassle of having to remortgage is also taken away with these longer-term deals. Although remortgaging, rather than defaulting to your lender’s standard variable rate, is better value for money, it can also be a lot of work.
Fix for 10 years and you don’t have to worry about changing your rate for a decade – unless you move house. Plus you only have to pay one set of fees.
What about the pitfalls?
Lack of flexibility tends to be the main drawback of 10-year fixed rates. If, for example, interest rates were to go down again in five or seven years, you wouldn’t benefit.
More likely, you may want or need to move home and then you will be hit with an early repayment charge, if your deal is not portable.
These restraints are often the deciding factor which stop many borrowers signing up. Greg Cunnington, director of lender relationships and new homes at Alexander Hall, explained: “We still find that once the full detail of longer-term fixed rates, such as those for 10 years plus, are explained to customers the lack of flexibility tends to be too important a factor against them.
“You have an early repayment penalty whilst tied in, so although they may seem a good idea to hedge against any interest rate increases if you want to sell your property, or release equity from your home, in the fixed rate period your options are very restricted.”
He added: “Ten years is a long time to be able to predict your exact life circumstances. As always, if you are interested in a longer-term fixed rate mortgage my advice would be to speak to an intermediary to ensure they can advise you on all of the pros and cons, and take your unique circumstances into account when assessing if it would be the right option for you.”
Is there an alternative?
If you are keen to find ways to shelter from the storm, your best bet is to speak to an adviser or broker.
A 10-year deal might sound attractive but it may not work for you. In which case, you’ll need to discuss your options.
For example, you may prefer to compromise and opt for a five-year fixed rate. Ultimately, with interest rates rising it’s advisable to lock into a good rate sooner rather than later.
Rachel Springall, finance expert at Moneyfacts, said “Lenders are still launching attractive deals onto the market, so anyone who is still debating on whether to fix may be wise to do so now.”
