The ups and downs of the pandemic have left many people craving certainty – and new figures show that that desire extends to their mortgages, too.
Four in five said they would be willing to take a fixed rate lasting more than five years, in exchange for the peace of mind that their monthly payments would not change for seven, 10 or even 15 years.
They said they would be willing to pay up to £1,200 for this privilege, according to research by the lender Kensington Mortgages.
Mortgages are usually taken out for two or five years – but it is possible to fix for much longer
Typically, people take out mortgages with two or five-year fixed rates. After this they can remortgage on to another fixed deal with the same lender or another one.
If they don’t, their lender puts them on to their higher ‘standard variable rate’ for the rest of the term – typically around 25 years. This rate can move up or down.
But locking in for longer has become more popular. According to Bank of England research in 2020, mortgages with long-term fixes of five years now account for half of new mortgage lending – though the vast majority of those will be five-year fixes rather than longer deals.
‘This is partially due to affordability changes and being able to borrow more on a five-year fixed due to stress tests, but the average costs between the two has decreased making the five years more affordable,’ says Nick Mendes, mortgage technical manager at John Charcol.
Beyond this timeframe, mortgages are readily available with fixed periods of up to 10 years.
There are a handful of 15-year deals on the market, and there is even one product, Habito One, which allows borrowers to fix for up to 40 years, albeit at a high interest rate.
|Lender||Fix length||Deposit||Rate||Fees||Annual cost for
|Yorkshire BS||7 years||35%||1.70%||£495||£5,966|
|Skipton BS||7 years||25%||1.99%||£0||£6,096|
|Virgin Money||10 years||35%||1.95%||£883||£6,157|
|Virgin Money||15 years||35%||2.55%||£883||£6,555|
|*Based on a 25 year term|
These products have not historically been popular. However, mortgage rates have hit all-time lows in the last few months, which could make the idea of fixing a rate for the next decade attractive.
It might sound especially appealing given that there are rumours of an increase in the Bank of England’s base rate – which would bring mortgage rates up with it – perhaps as early as December.
‘As we move into an era of rate rises, borrowers will ask the question “Should I fix for longer,”‘ Mendes adds. ‘The instinct to protect the single most important and expensive outgoing in a household’s budget – their mortgage – is only natural.’
When This is Money asked mortgage brokers whether they were recommending their customers fixes longer than five years, opinion was split.
Robert Payne, director at Langley House Mortgages, says he can see the benefits.
‘Long-term fixes are probably the most undervalued and undersold product on the market right now,’ he says.
‘Many homeowners are unaware of the benefits these products can offer, especially at the moment where rates are at an all-time low. They are certainly worth considering if you have a [big deposit] and plan to stay in your property long term.’
Locked in: Those with big deposits could benefit from a longer fix if the Bank of England’s base rate goes up – but only if they are sure they won’t want to move home
Among the attractions of a longer fix are that they can typically borrow more, as knowing what the mortgage payments will be for many years makes it easier to pass the lender’s stress tests.
Being on a ten-year deal also gives homeowners more security if their income was to change in the short term – for example if they lost their job or became self-employed.
‘Lenders assess affordability against criteria at the point of application, so if you are looking to change profession or change your employment status, tying into a longer-term deal could give you the stability to fit within these plans,’ Mendes says – though he stresses that they must ensure their mortgage payments are still affordable.
They will also save on fees, as fixing for longer means they will not need to keep paying fees for arrangement, valuation and solicitors on a remortgage every two or five years. Arrangement fees are now reaching up to £1,500 in some cases.
But fixing for more than five years is not for everyone.
Firstly, the cost of the mortgage will generally only be competitive with standard two-and-five year rates if the borrower has a large deposit of at least 25 per cent.
For example, the cheapest two-year fix for someone with a 60 per cent deposit is 0.86 per cent, while the cheapest longer fix is a seven-year deal at 1.39 per cent – a difference of just over 0.5 basis points.
But for those with smaller deposits, it doesn’t make as much sense. The cheapest two-year fix for someone with a 10 per cent deposit is 1.74 per cent, but the cheapest rate on a ten-year fix is 3.89 per cent – a basis point difference of 2.25.
It is impossible to predict exactly how much interest rates will rise and when, so taking on a longer fix always has an element of the unknown.
Though they are unlikely to fall below their current levels, the slightly higher cost of a longer fix could be outweighed if rates on two or five-year fixes did not rise by much.
Aside from the cost, the most important thing a homeowner considering a longer fix needs to ask themselves is what their life might look like at the end of that term.
What if you end up living next to the neighbors from hell? The pitfall of a 10 year fix is that you’re stuck with that deal if your circumstances change
Rhys Schofield, Peak Mortgages and Protection
Most brokers do not recommend a long fix for those that think they might need to move, for example, as the mortgage is rarely able to be ‘ported’ to another home.
Lewis Shaw, founder and mortgage expert at Shaw Financial Services, says that situations where it can work is for a family with children in school who know that they don’t want to move until they finish their education – or for an older couple who only had seven, 10 or 15 years left on their mortgage.
But he says that he sees many clients struggling to keep to even a five-year fix after a couple of years.
‘We see so many people that tie in for five year deals and then want to move in the middle of them,’ Shaw says.
And even a homeowner does not think they will move when they take the loan, they warn that a lot can happen in a decade.
‘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?’ asks Rhys Schofield, managing director at Peak Mortgages and Protection.
‘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.
‘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’
Leaving a fixed mortgage deal early can result in huge costs, often 5 per cent of the loan value
Exiting the mortgage early can incur huge costs – often up to 5 per cent of the total amount borrowed – though some deals have a sliding scale that reduces the longer that you hold the mortgage, often ending up as low as 1 per cent of the loan amount.
There are also some 10-year fixes that have the same early repayment charges as a five-year – as Joshua Gerstler, chartered financial planner and owner at The Orchard Practice, points out.
‘TSB is currently offering a 10-year fixed rate mortgage at 2.19 per cent, but the great thing is they will not charge you an Early Repayment Charge if you want to leave after year 5,’ he says. ‘You get the certainty of a 10 year fixed rate with the flexibility of a five year.’
Borrowers will also want to check what restrictions there are on overpaying their mortgage. Many deals allow this up to 10 per cent of the balance in any given year.
With a longer fix, it would take you longer to pay off your mortgage through overpayments – as those on shorter deals could get to the end of their fix and then drop on to a standard variable rate where they could repay without penalty.
Anyone considering a longer fix will ultimately need to take a view on where the base rate is going, and to calculate what this would mean for their monthly payments in a variety of different scenarios.
Consulting a whole-of-market broker can help with this – but as the last year has shown, anything can happen.
In the absence of a crystal ball, whether or not they are comfortable with committing to a mortgage for a decade or even longer will ultimately be for borrowers to decide.
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