Interest rates; state of play
Not even the country’s top economists know exactly when interest rates will start to go up. Yet we all know the Bank of England base rate can’t stay at its current slump of 0.5% forever.
And with the economy on the up and two of the nine members of the Monetary Policy Committee (MPC) – which sets the base rate – voting for a rise in August, there’s the possibility at least of an increase before the year is out.
If – or more like, when – this happens, millions of homeowners who are on variable-rate mortgages will face higher mortgage repayments as a result…unless, of course, they take out a fixed rate deal that will cost the same regardless of interest rate movements.
Fixed rate mortgages come with terms of two, three, five and 10-years – and, according to a recent poll we ran asking how long you would ideally fix in for now – nearly a quarter of you (24%) answered10 years.
But is it wise to fix in your mortgage rate for an entire decade?
Let’s take a look at the pros and cons.
- You’ll have the security of knowing exactly how much your monthly repayments will be for the agreed term
- Interest rate are the lowest they have been in since records began (we’re talking 17th Century!) so freezing your rate now is perfect timing
- A decade’s worth of cheap rates could prove amazing value for the overall cost of your mortgage – much of which is interest payments to the lender
You’ll only pay an arrangement fee – typically £1,000 or more – once in 10 years.
- Fixed rate mortgages come with early repayment charges (ERCs) which last for the length of the deal. This means, if you want to pay the loan off early in the next 10 years (you inherit for example, or want to sell up), it’s likely to cost thousands of pounds
- The security a fixed rate mortgage provides generally means the rate is more expensive than a variable-rate deal such as a discount or a tracker
- By freezing your rate, you COULD miss out on a more competitive deal should the cost of fixed rates fall.
So who SHOULD consider a 10-year fix?
Is this your forever-home? Are you secure in your job and unlikely to move in the next 10 years – perhaps because your children are settled in the early years of a local school?
If any of the above applies, why not shelter yourself from payment hikes and forget about your mortgage for the next 10 years?
Even though fixed rates are not directly linked to the bank of England base rate, they are linked to swap rates – which move in anticipation of base rate. And of course, base rate is only going up.
James Cotton at our mortgage broker partner, London and Country said: “A long-term fix can offer certainty and security.”
Who SHOULDN’T consider a 10-year fix?
Fixed-rate mortgages are often recommended for first-time buyers who might struggle if rising rates pushed up their repayments.
But how likely are you to spend a whole decade in your first home?
While most mortgages are portable (can move with you to a new home) there are no guarantees that the bank or building society will…
- …agree to lend you the extra funds you need to move up the ladder
- …agree to lend against the new property at all – if it’s an unusual build, or above a shop for example.
And having ‘portable’ deal won’t help you if you need to sell up entirely – for example because you split up with your partner or want to move abroad for work.
So if you have any doubts, a shorter-term fix or a variable-rate deal may prove a more sensible choice.
As James Cotton puts it, “Tying yourself in for 10 years might not work out well if your circumstances change.”
The best deals
If you DO decide a 10-year fix is for you, there’s not a huge number on the market. Still, it pays to shop around - so here’s our top four for a range of deposit sizes:
- 35% deposit: Leeds Building Society has recently pegged down the cost of its 10-year fix to 4.19%. It's the fee though, of just £199, which is the most eyecatching.
- 30% deposit: Woolwich (Barclays’ mortgage lending arm) has a cheaper rate of 3.99%, until the end of September 2024. The arrangement fee is steep though at £1,499.
- 25% deposit: Yorkshire Building Society has a deal charging 4.34% for 10 years which comes with a low arrangement fee of £130.
- 20% deposit: Newcastle building society has a 10-year fix at 4.49% with a completion fee of £270.
Always weigh up the fee against the rate – and remember ALL these deals come with early repayment charges to match the term.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.