The Bank of England is expected to put the base rate up at least once this year, bringing with it the possibility of higher interest rates for mortgage holders.
According to mortgage broker Private Finance, a 10-year fixed rate mortgage taken out in May would have cost just 1.04% more than a two-year fixed rate. With the difference between short fixed terms and longer terms being the smallest in a decade, borrowers are considering whether long-term certainty for a fraction more is worth it.
Traditionally, UK borrowers have opted for two or three-year terms, buoyed along by the changing market place and the need for flexibility to switch deals regularly and save money. However, in the current market place where further base rate rises are a possibility, many buyers are looking at longer-term options. While 10-year mortgages were a rarity between 2009 and 2014, according to moneyfacts.co.uk there are now 114 products available.
Mainstream banks such as TSB and Barclays and building societies such as the Coventry and the Nationwide all offer decade-long fixed rates, as customers have wanted to take advantage of the low-rate environment and secure long-term certainty.
Virgin launches seven and 10-year fixed mortgages
Most recently, Virgin Money has launched a range of seven- and 10-year fixed rate residential mortgages in the past month, offering a seven-year fixed mortgage at 65% loan to value (LTV) at 2.37% and a 10-year fixed mortgage at 90% LTV at 3.25%, both with a £995 product fee.
Director of mortgages at Virgin Money, Andrew Assam, said: “We’re delighted to launch our new long-term fixed-rate mortgages. We have seen an increased appetite from customers wanting the opportunity to future-proof their mortgage repayments.
“With interest rates still relatively low, we’re offering homeowners the peace of mind of low mortgage payments for the next seven to 10 years.”
Lower rate two-year fixes could cost more over a decade
The rising costs of shorter-term deals mean that there is a narrowing price gap between 10- and two-year fixed rates, with the difference in monthly repayments cut by 27%. This could mean that over 10 years, choosing a lower two-year rate could cost borrowers more than the longer-term mortgage. Modest base rate rises coupled with remortgaging costs over the course of 10 years could easily absorb any savings made by opting for two-year lower rate fixes.
Shaun Church, director of Private Finance, said: “The UK mortgage market has tended to favour a short-term fix, but longer-term options are looking increasingly attractive in anticipation of the Bank of England following through with incremental rises to the base rate. Locking in for a decade can give borrowers immunity from further rate rises hitting their monthly repayments and allow them to benefit from today’s low pricing for up to a decade.”
For those that are considering selling, moving or remortgaging during the next decade, the early repayment fees might make a long-term rate less appealing, but for those staying put and wanting a long-term financial strategy, a 10-year fixed rate is the perfect product.