Mortgages: should you commit to a 10-year fix?

Published by Edmund Greaves on 31 August 2018.
Last updated on 31 August 2018

Mortgage

With the Bank of England’s base rate rising above 0.5% to 0.75% for the first time since March 2009, the question on many mortgage holders’ lips will be what to do next.

Are you already on a fixed-rate mortgage?

Currently, two-thirds (66%) of all mortgage borrowers are on a fixed-rate mortgage, according to the Building Societies Association (BSA). However, if you’re one of the 34% of households currently languishing on a standard variable rate (SVR), you should urgently consider remortgaging onto a fixed-rate.

The 0.25% increase to the base rate adds around £25 a month to a £200,000 mortgage with a typical SVR says broker London & Country Mortgages. This is an extra £300 a year on your bills – and if the rate goes up again, which some experts believe to be the case, then you’re in for another hit.

Try a 10-year fix

When it comes to fixing, there are options from one to 10 years. But the number of 10-year fixed term products, while relatively small, has increased significantly, according to financial information business Moneyfacts.co.uk.

At present, there are 139 10-year fixed rate mortgages on the market – a rise of 35 in the last 12 months. Ahead of the base rate rise on 2 August, the number increased from 115 products to 139. So, lenders are clearly anticipating more demand. The average rate for these products is also dropping. In July 2016 it was 3.52%. This compares to 3.1% now.

However, before diving in and taking a long-term rate it is important to compare value against other products. See the table for the current best buys for remortgagers.

Looking at these deals, a two-year fix works out as £549 a year cheaper than the 10-year deal.

Best buys for remortgagers (i)

Provider Fixed-rate period Interest rate Monthly cost Annual cost Fees or cashback?
Nationwide Building Society Two years 1.94% £641 £7,447 No fees, £500 cashback
Nationwide Building Society Five years 2.19% £652 £7,727 No fees, £500 cashback
HSBC 10 years 2.49% £666 £7,996 No fees, no cashback
(i) Based on a typical remortgage value of £100,000 over 15 years on a £200,000 property. Source: London & Country, 31 August 2018.

Will the base rate continue to rise?

The question, then, is whether it is worth gambling either way. If you fix for two years, you’ll save £1,098 over the lifetime of the fix (compared to two years on the 10-year fix), but you will be liable to a hit in the future if rates rise. Taking the 10-year fix provides more long-term peace of mind, but has the detriment of locking you in for a long time at a higher cost.

Nick Morrey, product technical manager at mortgage broker John Charcol, explains: “If you don’t mind paying fees and the administrative hassle of remortgaging or product switches, and don’t mind the uncertainty of future increases, and minimised monthly payments is a very high priority, then rolling two-year fixed rates may be a viable option.

“If you do not like uncertainty, and cash flow is not a top priority and you do not necessarily wish to move or borrow more in later years, nor do you expect significant lump sums to become available to pay down the mortgage beyond any overpayment facility, then a 10-year fix is a genuine option you may not have considered before.”

However, it is ultimately impossible to predict whether the Bank of England will raise rates again. Experts agree that if it does, it is likely to be a slow and gradual rise.

Mr Morrey adds: “What is worrying some people is the repeated messages regarding future interest rate rises.

Up until recently the Bank of England had been talking of three rate rises this year, although that looks increasingly unlikely.

“However, the chance of higher rates is more likely than lower, and recent mutterings from Threadneedle Street have been along the lines of a bit higher but not back to what they were pre-2008.”

FEATURED PRODUCT

HSBC 10-year fixed-rate mortgage 2.49%

Fix your mortgage for longer with this HSBC product that comes with a rate of 2.49%. Based on a £100,000 mortgage repaid over 15 years on a £200,000 property, this equates to monthly repayments of £666 (£7,996 annually) and no fees to pay.

 

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