WITH so much ongoing political and economic uncertainty, borrowers are likely to be worried about how this will affect mortgage rates.
For those concerned about their future finances in the wake rising inflation and expectations of higher interest rates – the best solution may be to search for long-term security.
A fixed-rate home loan will mean you a set amount each month for an initial period, regardless of rate decisions made by the Bank of England.
This will shield you from unpredictable financial times, leaving you safe in the knowledge your mortgage will not rise.
Resurgence of 10-year deals
Historically, borrowers have flocked to two, three and five-year fixes but more and more people are now considering fixing for 10 years, thanks to the stability this type of deal offers.
A long-term fix will ensure you know exactly what you will owe – and when – while the terms of the UK’s future relationship with the EU become clear. In fact, you will give yourself the peace of mind of knowing your mortgage payments will stay the same right through until 2027.
Mortgages of this duration certainly look appealing right now, with deals flourishing and rates at historic lows.
However, you need to be careful about locking in for this period, as it’s hard to know what you will be doing – and where you will be living – a decade from now.
Fixing for this many years ahead could end up costing you dearly if your circumstances change, and you end up wanting to exit the deal early.
Deals are flourishing
Findings from analyst, Moneyfacts, show the 10-year fixed-rate mortgage market is thriving with more than 120 deals on offer at a recent count.
At the same time, competition between lenders is causing rates to fall, with lenders offering historically low rates on 10-year fixes.
In fact, figures from Moneyfacts show average rates having dropped from just over 4% to just over 3%. However, it’s important to note that mortgage rates across the board could rise.
Beware of early repayment charges
While a decade-long fix gives you the peace of mind of knowing your repayments will stay the same, no matter what happens, these deals require you to be tied in for the full term, hindering flexibility in the future.
So, if you do end up needing to exit before the full 10 years is up – for any reason, such as divorce, redundancy or a change of job – you could face a hefty early repayment charge (ERC).
Before committing to a 10-year fix, it’s essential that you do the maths – and especially if you think you’re going to need some flexibility.
Deals may be portable
On the plus side, many long-term fixes are portable; this means that if you are moving to a new property, you can take the mortgage with you.
However, there is no guarantee you will meet the lender’s criteria when you come to make that move, as affordability may need to be reassessed. There is also no guarantee that rates on any additional borrowing will be competitive.
Other factors to consider
You also need to bear in mind that some of the cheapest deals will only be offered at 60% (or even 50%) loan-to-value (LTV) [of the property], meaning you will need a hefty deposit (or equity stake) to be able to apply. Fees can also be steep on a 10-year fix, with a sum of £1,000 or more fairly standard for this kind of deal.
How long to fix for?
Right now, the rates on the best 10-year fixes are easily beaten by the rates on the cheapest two and three-year fixes.
So, if you think there is a good chance that you will want to move or need to review your mortgage in a few years’ time, you may be better off opting for a two or three-year deal.
Equally, if you are looking for medium-term security, a five-year fix may be the answer. It will offer some protection if interest start rising, but will mean you aren’t tied in for such a long period of time.
That said, in unceratain times, some borrowers will be drawn to the security and certainty of a deal lasting for a decade. After all, you won’t have to go through the rigmarole of remortgaging in two or three years’ time, paying fees again, and facing potentially higher interest rates in the future.
Which borrowers are best suited to a 10-year fix?
Taking all this into account, a 10-year fix may be best suited to a mature borrower with a decent amount of equity; this could be someone who is looking to re-mortgage, and unlikely to move for the foreseeable future.
By the same token, a shorter fix may be a better option for a first-time buyer who is likely to move a few more times in the years ahead.
But the choice you make will, of course, depend on your individual circumstances and your plans for the future.
Rates could go up
If you are set on choosing a 10-year fix, you need to be aware that while rates are competitive at the moment, there are signs that they are being repriced upwards.
This could be an indication of what is in store for long-term fixed-rates in 2017.
The key advice is not to delay decision-making on your mortgage. For now, there are ultra-low rates available on fixes, but these deals may not be around for too much longer.
If you're thinking about signing up for one of the cheap deals on offer, it's likely to make sense to act now, to avoid paying more than you need to.
Equally, if you are sitting on your lender’s standard variable rate (SVR) – the rate you revert to once an introductory offer comes to an end – you should seriously consider opting for a new fixed-rate right away. There are big savings to be made on your monthly repayments by making the move.
While it makes sense to act sooner rather than later, if you’re unsure about how long to fix for, it’s important not to rush into a decision. Seek advice from a professional so you can work through all your options based on your circumstances (find out how FSCS protects home finance and mortgage advice).
And whatever you do, make sure you do your sums factoring in both headline rate and fees, so you understand the true cost that you are paying for financial peace of mind.