The mortgage price war gained momentum last week when Barclays launched the lowest ever 10-year fixed rate deal.
Barclays’ 10-year fix, offered under the Woolwich brand, comes with a rate of just 2.99% and a £999 fee. However to fix your mortgage rate under 3% until 2025 you’ll need at least a 40% deposit or equity in your property. Borrowers with a 25% deposit can fix for 10 years at 3.99%.
Barclays’ product launch comes after several other lenders launched competitive 10-year deals at the end of 2014. In December Santander and TSB both launched 10-year fixes starting at 3.44%.
Increasing choice in the 10-year fixed market
The past year has seen a massive increase in the number of 10-year fixed rates on offer. According to financial analyst Moneyfacts, this time last year there were just eight 10-year deals for borrowers to choose from. By October that number had risen to 22, but just three months later the figure now stands at 77. This means the 10-year mortgage sector is over five times larger than it was in January last year.
Historically borrowers have favoured shorter term deals, but the low rates now available on longer term fixes mean fixing for longer is becoming increasingly attractive.
According to Moneyfacts, the average rate for a 10-year deal fell from 4.23% in January 2014 to 4.17% today, the lowest rate ever recorded for this sector.
In some other countries long-term fixes are the norm. In the US for example, it’s commonplace to fix your mortgage rate for 25 or 30 years.
Pros and cons of 10-year fixes
If you fancy fixing your mortgage rate for 10 years, now is a good time to do it with so many great rates on offer. You can then sit back and know for certain what your mortgage payments will be for the next decade.
One advantage of 10-year fixes is that you won’t have to go through all the hassle of remortgaging again in two or five years, working out costs, or worrying about your credit record or equity in your home.
Traditionally borrowers have shied away from longer-term fixes for fear of missing out on better rates that become available later on. But with the Base Rate at an all-time low and the next movement definitely being upwards, chances are you shouldn’t be too concerned about better rates coming along later.
However, there are several things borrowers should watch out for if they plan to fix for 10 years. For example, is the loan portable? This is where you take your existing mortgage with you when you move home. You might not be planning to move house, but a lot of things can change in a decade.
It’s also a good idea to check the deal’s early repayment charges (ERCs). Barclays’ 10-year fix, for example, comes with some hefty ERCs. Borrowers wanting to redeem their mortgage early will have to pay 6% of the balance repaid for the first seven years and 3% in the last three years.
How do rates compare?
Whether you should fix for 10-years could well depend on the rate you’re currently on. If you’re one of the lucky borrowers who’s on an ultra-low tracker with a current pay rate of less than 2%, you’ll be wise to stay put until a Base Rate rise looks more imminent.
If you do need to remortgage, or are buying your first home, you can get a much cheaper rate by opting for a two-year or five year deal. For example, HSBC is offering a two-year fix at 1.29% with a £1,499 fee. You’ll need a 40% deposit or equity to be eligible.
Monthly payments on a 25-year £200,000 home loan would be £780.28 with HSBC compared to £947.38 on Barclays’ 10-year deal.
HSBC subsidiary First Direct is offering a five-year fix at 2.39% to borrowers with a 35% deposit. However, this comes with a £1,450 fee you need to factor in.
Doing the sums
Big arrangement fees, such as those levied by HSBC and First Direct, can mean a cheap rate doesn’t necessarily mean a cheap mortgage so it’s important to do the sums. This means working out exactly how much you’ll pay in total (monthly repayments plus fees) over the fixed term, whatever length of fix you opt for.
For example, Yorkshire Building Society is offering a two-year fix at 1.39% with a £975 fee. Over two years, with a £200,000 mortgage, this would cost of a total of £19,924 compared to £20,225 with HSBC. So the Yorkshire mortgage works out £301 cheaper, despite boasting a larger interest rate.