As borrowers search for 10 year fixes - what should mortgage borrowers do if rates go up?

Journalist: Samantha Downes, Currently at the i (freelance)

ended 05. May 2022

There are currently loads of searches on 10 year fixes but is this a good idea? What are the pros and cons? Looking to do an explainer story for people considering long fixes like this. Looking also to reassure borrowers, as haven't these rate rises been priced in anyway? Deadline is 2pm.

6 responses from the Newspage community

"!0-year fixes are a good idea for certain borrowers, but shouldn't be entered into lightly. The redemption penalties can be eyewatering and 10 years is a long time. They're great if there's no chance of moving home or you're into the last 10-12 years of your mortgage and want to be able to forget about it. Definitely one to see advice on, though. Ideally from a broker with a fabulous beard."
Rates are constantly going up for the foreseeable, and 10-year fixes are only for those borrowers who have no intention of moving and are confident of this, as 10-year fix rates in the majority have some eye-watering early redemption penalties and lenders are not known to waive them just because after two years a better deal comes along. They are great for anyone with ten years remaining on their mortgage term and wish to not worry about rates changing and just fixing it for one last time.
"A decade is a long time. Think back to what your life was like 10 years ago and how much has changed since. Whilst there are some great rates out there now for a 10 year fixed rate mortgage, the biggest problem is the early repayment charges. If as much changes in your life in the next 10 years than has done in the last 10 years, the chances are you will want to change mortgages in that period, perhaps to move home, borrow more money, or even to pay it all off. If you are looking for a 10 year fixed rate mortgage, try and go for one of the deals that only imposes an early repayment charge for the first five years. That way you get the benefit of a 10 year fixed rate mortgage with the flexibility of a five year deal."
The upside of a 10-year fixed rate is easy to understand - you know exactly what your repayments will be for the next decade, regardless of what happens to interest rates. The downside is less obvious. If you do not move home, do not require any additional funds, or need to amend the mortgage in any way, then all is well. But, if you do need to do any of those things then, potentially, the 10-year fixed rate can bite you. You see the vast majority of mortgages, and fixed rates in particular, have Early Repayment Charges (ERC's), this means that if you repay more than about 10% of the balance in a year you will incur a penalty charge of the overpayment; typically between 3-5%. So, if you wanted to move home in year 6 of your fixed rate, and the current lender refused to allow the transfer of the mortgage to the new property, you could be looking at a £10,000 ERC on a £200,000 mortgage balance, as an example. So, the big question you need to ask yourself before taking on a long-term fixed rate is; how much flexibility do I need in my finances? When looking at the details of any long-term deal pay particular attention to the Early Repayment Charges, is the deal portable and what (if any) overpayments can you make?
Ten year fixes are a good option for budgeting security especially when faced with increasing rate rises. However, it is important to ensure that if considering a ten year fixed rate deal, you have absolutely no intention to move home, or make any changes to your mortgage in this time. Ten years is a long time to make a financial commitment , and life changes can occur unexpectedly. Should the unexpected occur, such as the need to remortgage, raise more funds, move homes this could incur a costly charge to change or leave your mortgage early. We have already seen interest rate rises in anticipation of the Bank of England Base rate increase over the past few weeks, and the mortgage market is changing very quickly with lenders adding and withdrawing deals from the market in this extremely competitive market. Advice from an Independent Whole of Market Mortgage broker who will go through your current circumstances and as importantly, your short, medium and long term plans, to ensure the mortgage deal is the most suitable for you now and in the future.
Ross Boyd
CEO at Dashly.com
"10-year fixes can be appropriate for some borrowers but for others they could prove costly if their circumstances change and they need to get out of their mortgage early. Then the early repayment charge could be punitive. Life moves pretty fast, to quote Ferris Bueller, and unless you're in your forever home, or are pretty confident you will stay in your current one for some time, enter a 10-year fix with caution. A lot of people are reading about interest rate rises daily in the news and this is certainly likely to be driving the number of searches for 10-year mortgages online. They offer a lot of security in a rising rate environment. As ever, though, seek advice from an independent mortgage broker who will point you in the right direction and ensure you don't make a decision you will regret. Always-on mortgage comparison platforms like ours will also flag up whether you could be better off switching mortgages during a 10-year fixed rate, even after all fees and early repayment charges have been taken into account. 10 years is a long time and if your equity in your property has increased a few years in, you could be eligible for a much cheaper rate at a lower loan-to-value. This could make paying an ERC worthwhile. In short, a long-term fix could actually be exited early in a way that saves you money."