Is choosing a record-low 10-year fixed rate a gamble worth taking?

Posted 16 March 2016 by Nick Parkhouse

A low rate and long-term peace-of-mind might sound tempting but are there reasons to think again about taking up a new mortgage fixed for ten years...

Over the last two years, an increasing number of very long-term mortgage deals have come onto the market. The choice of 10-year fixed deals has risen in recent months as borrowers look to fix their payments at record low rates.

Now, a leading lender has launched the cheapest ever 10-year fixed-rate deal. While it will help borrowers to lock in at low rates for ten years, experts say that fixing for a decade could be a gamble.

The Leeds Building Society has launched the UK's lowest rate 10-year fixed-rate product as competition between lenders in the long-term fixed market intensifies. The market-leading home loan allows borrowers to fix their mortgage at 2.75% until 2026 as long as applicants have a 35% deposit. There is a £1,499 fee applicable.

The Daily Express reports that “the number of decade-long mortgages on the market have jumped over the past couple of years, while rates have steadily fallen.” This latest deal does allow overpayments of up to 10% a year but comes with early repayment charges for the full 10-year term.

Charlotte Nelson, finance expert from Moneyfacts, says: "Borrowers have often considered a five-year fixed term as 'long term', but reconsidering this view and committing to a low-rate 10-year fixed mortgage may pay off when base rate does rise. 

"However, while we know base rate will eventually rise at some point, we do not know when or by how much, which makes taking out a 10-year deal a gamble, particularly as rates across the overall mortgage market are currently so low."

Committing to a long-term fixed rate can be a gamble

While borrowers can now benefit from very long-term fixed rates, some experts have warned that committing to a product for a decade can be a gamble.

Borrowers often find that their circumstances change in ten years, and changing a mortgage to reflect a new job, family or home can be tough. For example, the Leeds deal has early repayment charges for the full ten years, meaning that even if the mortgage is paid off in year nine, borrowers will face charges of 2% of the mortgage balance.

Leeds says that its 10-year deal is portable, which means that it can be transferred to a new property. However, a portability clause requires borrowers to satisfy a lender's criteria at the time a new mortgage is taken out. If your circumstances differ - or the lender's underwriting requirements have changed - you may find that you are no longer eligible for a mortgage with the same lender. You could then have to pay thousands of pounds in early repayment charges.

Nelson adds: "Borrowers must also bear in mind that most 10-year mortgages require them to be tied to the deal for the full term, so it is vital that they weigh up whether they will need extra flexibility, such as being able to transfer the mortgage to another home. Failing to do so could mean borrowers end up paying a hefty early redemption penalty.

"There is clearly a demand for longer-term fixed-rate mortgages, and with 10-year fixed rates cheaper than ever before, borrowers will have to weigh up the odds and assess whether the gamble will pay off."

 

Search  



Click here to see your activities