Long mortgage fixes - Mail Online / Thisismoney

ended 18. October 2021

A journalist at Thisismoney / Mail Online is writing  an article about mortgage fixes longer than five years, and when it is worth taking one out. It's pegged on new research from Kensington saying 83% of people are willing to pay a “certainty premium” of £1,200 per year to take a long-term fixed-rate mortgage above five years. The rates are fairly attractive - you can currently get a rate of 1.70% (£495 fee) with YBS for a seven year fix, on 75% LTV for example. So given the fact that interest rates are tipped to go up, is it worth fixing for that long and what do borrowers need to look out for?

Keep your responses to a sensible length - deadline is COB but sooner rather than later best.

10 responses from the Newspage community

There are a few scenarios where recommending a longer than 5yr fix may be appropriate, such as the clients are in the last 7-10-12 years of their mortgage, the children have left home and they have no plans to move. Another scenario would be where people are moving to the main family home the children are almost at school age and they know they're not going to move out of the catchment until the children leave school. However, most of the 7/10 yr deals only really make sense if you have more than 40% deposit or equity. As brokers, we see so many people that tie in for 5yr deals and then want to move in the middle of them. If someone is going to opt for a longer fixed rate they need to be very certain they're not going to have to come out of the deal as the redemption penalties can be very costly. As always it's best to get advice on this - you know what they say about assumptions.
Star Quote
"Long-term fixes are probably the most undervalued and undersold product on the market right now. These products are certainly worth considering if you have a low loan-to-value and plan to stay in your property long term. Many homeowners are unaware of the benefits these products can offer, especially at the moment where rates are at an all-time low. You can even get 10-year fixed rates that have 5-year early repayment charges, giving you ultimate flexibility."
Star Quote
"The long term certainty of the interest rate is great, and while rates are so low it is a fantastic time to take advantage of it. However, for most people, a lot can change in 5-10 years. You need to look out for the Early Repayment Charges in case you want to get out of the deal early. TSB are currently offering a 10-year fixed rate mortgage at 2.19% but the great thing is they will not charge you an Early Repayment Charge if you want to leave after year 5. You get the certainty of a 10 year fixed rate with the flexibility of a five year."
"It may well be a perfect time for those considering a longer term fixed rate to act now. The Bank of England is dropping an increasing number of hints that interest rate increases are imminent so if you can find a long-term low, flexible rate then now may well be the time to grab it. Be sure that it offers flexibility to move or repay in case you need to during the fixed period."
There are so many cheap long term fixed rates at the moment borrowers are spoilt for choice. Even if the base rate increases over the coming months, there will still be lots of great deals to choose from. While the seven and ten-year fixes look appealing, borrowers need to make sure they want to stay in their property for the foreseeable future before they take one of these rates. We consistently speak to borrowers who have locked into long term deals, and they are now paying the early repayment charges because their circumstances have changed and they are moving home.
This is the magic question, it does depend on whether you are looking to move within the next five years as if you would potentially incur early repayment charges. However, if you intend to stay in the property for this period it is certainly worth considering as the gap between 2 and 5 year fixed is now very low, the premium to fix for longer is now as low as 0.10% in some cases. For example, if you are borrowing £1m with nationwide with a 60% LTV, the 2 year fixed is 0.84% and the five year fixed is 0.94%. If rates increased by 1% at this level, the higher interest cost would be significant.
The reality is that a super long term fix may be a good idea if you are certain to not to move home again for the long term, but who can honestly say that they know exactly what they will be doing in 10 years time. What if for example you end up living next to the neighbors from hell? Because the pitfall of a 10 year fix is that you're stuck with that deal if your circumstances change and very often there is a whopping early redemption charge for coming out of a deal early and no guarantee that the mortgage can be ported to an alternative property.
I'm always a little cautious with fixed rates longer than five years, not due the rates (which are often quite attractive), but due to the commitment to the mortgage that is required from the borrower. You see with the agreement by the lender to not change your interest rate, you also agree to not repay the mortgage in that time - or you face early repayment charges, 5% of the balance is not uncommon as a typical example, which is a £10000 extra charge to repay a £200000 mortgage. Given that many people are uncomfortable guessing what their life may look like in 7, 10, or 15 years time it makes fixed rate deals over 5 years a gamble that many are not willing to take. The key to any longer term deals success will be in it's flexibility; is it portable (so can be transferred to a new house if you move)? Does it allow over payments without penalty? What are the early repayment charges and how long do they run for - deal with a 1% charge is a very different proposition to one with a 5% charge, or a 10 year deal that only ties you in for the first 5 years for example? It is all of these factors, beyond the interest rate and the fee, that can be the issues that catch borrowers out. The longer the fixed rate and the longer the commitment being made, the more sure you have to be of the terms and conditions you are signing up to.
Interest rates being tipped to increase is nothing new, and is something we have seen and been told constantly for over 10 years since the property market crashed. Whilst no one can predict the future, you are paying substantially over the odds for a seven year fixed rate compared to the annual cost of a five year fix for only two years additional security, and the comparison becomes even wider against a ten year fixed deal. The longer term seven or ten year fixed deals offer the ultimate security and peace of mind, and the importance of this cannot be underestimated for some, however in recent years have never worked out as the cheapest overall proposition. The ultimate long term security can be attractive, especially those settled in their forever home with minimal chance of their circumstances changing, however for those intent on moving up the property ladder, locking into a seven or decade long deal now would rarely be seen as the right advice.
Taking a fixed rate should be more about your own personal life plan, rather than focusing just on your monthly payment. Fixed rate mortgage deals come with Early Repayment Charges (ERCs) if you clear them before the end of the fixed term, and your life circumstances and requirements may change - sometimes significantly - a few years from now. Most people can predict where they will be, or at least where they want to be, in 2 years time; and many can draw this out to 5 years. But you need to ask yourself if you can predict what your life will look like in 7 or 10 years time to make these deals really work for you. The only notable exception to this is with TSB, who only have ERCs for the first 5 years of their 10 year fixed rate (which is at a competitive 2.59% for a 75% LTV mortgage.)