Here is our guide to how long to fix your mortgage for after the interest rate hike
With the Bank of England raising the base rate, Brits' biggest concern is the cost of borrowing — we take a look at the pros and cons of 2-year, 5-year and 10-year fixed rate mortgages
RISING numbers of us are fixing mortgage deals for a DECADE in a bid to beat looming price hikes.
Previously borrowers have shunned lengthy deals to avoid the potential aggro of forking out hefty penalties for ending their contract early.
But now the bigger concern is the rising cost of borrowing, with the Bank of England raising the base rate from 0.5 per cent to 0.75 per cent on Thursday and more hikes likely in coming years.
This is prompting more homeowners to opt for the longest fix possible to safeguard against rises.
A third of mortgage owners say they would consider fixing for a decade, a poll for the Mortgage Advice Bureau has found.
The top reasons were knowing what repayments will be and a belief that interest rates will go up.
To cater for the rising demand, the number of ten-year fixed-rate deals has increased by 35 since a year ago, found.
At the same time, the average rate has fallen as lenders battle for the new long-term customers.
It has now dipped so low that there is just 0.17 percentage points between the average five-year and ten-year fixed rates. That’s a difference of just £11 extra per month for the security of a longer fix.
The market leader for new mortgages is currently offered by Coventry Building Society, which is offering the cheapest ever ten-year deal at 2.39 per cent for those with a 50 per cent deposit. A £999 arrangement fee applies.
Some ten-year deals are even cheaper than the five-year ones.
But these products won’t be for everyone. Those with higher loan to value (LTV) deals — which means the bank owns most of your home and you have a smaller stake — will be offered steeper fixes.
Even if you do get offered a market-leading rate, it is still a gamble.
You need to weigh up whether you would be better off remortgaging to a lower-LTV deal in a few years’ time rather than staying on the same fix for a decade.
HOW TO CHOOSE
2-YEAR
PROS
- Good for people who can only afford the cheapest possible deals as two-year deals offer lower interest rates.
CONS
- It won’t be long before the deal ends and you’ll need to remortgage or end up on your lender’s Standard Variable Rate (SVR). These have much higher interest rates so you’ll face a significant hike in your monthly repayment.
- Only slightly better rate than the five-year deals that are currently on the market.
5-YEAR
PROS
- Gives you a decent length of security without locking you in too long.
- Great for first-time buyers with small deposits, as rates remain stable when compared to shorter deals.
- Also good for busy people who can’t face the remortgaging process coming around after two years, or if you’re coming to the end of your fix.
CONS
- Higher rates than two years but only marginally lower than ten years.
10-YEAR
PROS
- Long-term security. Only one arrangement fee for the ten years. These can be between £500 and £2,000 – which adds up every two or five years.
CONS
- If you need to end the deal early you will face a hefty penalty and it might be tricky to port it on to another property if you want to move.
- Not great for most first-time buyers as the best deals aren’t available to those with small deposits.
The flipside is whether you want to protect yourself from rising interest rates, which will be more cost effective long term. No one knows what will happen to the rate in the future, so either way you could lose.
Peter Gettins, of mortgage brokers L&C, said there is no point trying to play the market — instead, homeowners should focus on their own circumstances. He told the Sun on Sunday: “People need to look at where they are in their lives and what they can see for the foreseeable future and decide what level of security they want.
“It comes down to how much you value that additional level of security that paying a bit more for a ten-year fix would give you.”
Brian Murphy, of the Mortgage Advice Bureau, reckons ten-year deals are often suitable for people at particular stages in their life.
He said: “The security of a ten-year deal will see certain types of borrowers through to a significant point in their lives, such as perhaps seeing children off to university or reaching retirement age.
“Some borrowers may find that ten years is the length of time they have left on their mortgage, and therefore fixing for the remainder of the term provides reassurance.”
And remember there are redemption penalties if you want out.
Early repayment charges can be up to seven per cent of an outstanding mortgage balance, so if you still owe £100,000, that means a £7,000 fee to switch to another product. But some lenders are also making the terms of their early repayment charges less onerous. TSB, for example, is only applying the charge to the first five years of its ten-year fixed-rate deal.
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It is also worth bearing in mind that most ten-year fixes have some form of portability, so you could still move house over the term.
But there are no guarantees your provider will let you do it and you could end up borrowing at an uncompetitive rate.
Check out Mr Money’s guide to how long to fix your mortgage for.