Mortgage blog: Everything you need to know about long-term fixed rates
Since the turn of the year, around four in five new mortgage borrowers have taken out their home loan on a fixed rate basis. Competition between lenders and the government's Funding for Lending scheme has driven down the cost of fixed rates to record levels with five-year deals now available at under 2.5%.
However, an increasing number of long-term fixed rates have appeared on the market in recent weeks and a leading lender is now offering the cheapest ten-year fixed-rate mortgage in history. But are long-term fixed rates really the right choice for you?
Ten-year fixed rates hit a record low
The Daily Mail reports that "mortgage rates which last for a decade have fallen to a fresh low". The Norwich and Peterborough (N&P), part of the Yorkshire Building Society, has reduced the cost of its ten-year fixed rate to just 3.84%.
The newspaper reports that on a typical £150,000 loan, monthly repayments work out at £779 and total cost over the ten years is £93,480.
"This is certainly an exceptional deal, offering a low rate for an extended period," says Keith Osborne, editor of WhatHouse.co.uk. "However, shorter-term fixed deals tend to be more popular with borrowers and are currently priced around 2.5-3%. I would say that a ten-year deal is a niche product but if you're looking for a long-term peace of mind then it is certainly something to consider."
The pros and cons of a long-term fixed rate
The main advantage of a long term fixed rate is that it gives you the security that you will know exactly what your mortgage repayments will be for the next ten years. You won't have to worry about interest rate rises as you'll make the same payment for ten years. And you won't have to worry about remortgaging every couple of years which is something you would have to consider with a shorter-term deal.
However, there are downsides to a ten-year fixed rate. Osborne continues: "While the N&P's ten-year fixed rate is the lowest ever, it is still around 1% more expensive than the rate on a five-year deal. Borrowers looking for the cheapest payments may be better off with a shorter-term deal."
In addition, fixing your mortgage for a decade removes much of the flexibility you have as it commits you to a lender and a product for ten years. If you have to move home during that period you will be tied into a deal. And, if you try to come out of your deal early you will face significant early repayment charges.
"In the first three years of the N&P deal you will have to pay 7% of your loan if you want to come out of the deal. This charge reduces by one percentage point a year until it is 1% in the final 12 months of the term," adds Osborne.
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