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Fixed rate mortgages: how long is too long?

Ruth Davies 02 October 2015

If you're looking for a mortgage at the moment, the chances are you're considering a fixed rate.

Right now, borrowing is cheap. Rates in 2015 have reached lows that previous generations of homeowners could only have dreamed of.

But that could all change in the coming months. Bank of England governor Mark Carney has hinted that a rate rise could come at the turn of the year.

Because of this, consumers are increasingly interested in long-term fixed rate deals (five years or more). In particular, our 10 year fixed rate mortgage table is one of the most popular on the site.

Compare 10 year fixed rate mortgages

However, is there such a thing as too long to fix? Are there ways you could lose out? We run through the vital questions.

Why fix?

The (obvious) main advantage of a fixed rate mortgage is that you know exactly what your monthly payments will be for a given period. This protects you against the financial impact of a rate rise.

The trade-off is that interest rates on fixed rate mortgages are usually slightly higher than their variable rate counterparts. What you've got to weigh up is whether you think that rates are likely to rise above the fixed rate you're looking at over the initial period.

There's also the commitment. In exchange for rate security, you'll have to pay extra if you want to get out of the mortgage during the fixed period. These charges are called ERCs (Early Repayment Charges) and they can be high during the first few years.

Taking out a fixed rate mortgage is essentially "betting" that rates will rise, which right now looks like a fairly safe bet. Taking out a variable rate mortgage (such as a tracker) is betting that rates will stay low.

How would a rate rise affect you?

Although it's very likely that the base rate will go up in the next few years, what will this actually mean for mortgage rates? Will they rocket up to pre-crisis levels, or will they increase modestly in line with the base rate?

All the indications are that the forthcoming base rate change will be small, and while we can't predict the future, what we can do is look at the relationship between the base rate and mortgage rates in the past.

  • In November 2005, the base rate was 4.5%. The average rate for a two year fix at 75% LTV was (according to Bank of England figures) around 4.8%.
  • In November 2007, shortly before the financial crisis, the base rate was a whopping 5.75% and the average 75% LTV two year fix was… around 6%.
  • So historically, mortgage rates don't seem to stray too far above the base rate – probably due to competition between lenders to offer the best rate possible.

Obviously none of this is an indication of future rates, but if the base rate were to rise to say 1%, it would be surprising to see average mortgage rates much higher than 2%.

Of course, when it comes to your mortgage payments, no increase at all is preferable to a small increase, but you may decide that this is a price you're willing to pay in order to retain flexibility.

Compare fixed rate mortgages

Ten years is a long time...

In an effort to attract customers, mortgage lenders are now improving their ten year fixed rate offerings – at the time of writing there are more than 40 ten year fixed rate deals in our mortgage table. However, before jumping at the longest fix you can find, it's important to weigh up the benefits and drawbacks of such a long commitment.

Benefits:

  • You know exactly what your mortgage payments will be for the next ten years, allowing you to plan your finances in the medium to long term.
  • Fixing now could protect you from a rise in interest rates.
  • In ten years you could have remortgaged three times with standard deals, so fixing for a decade could save you money on fees.

Drawbacks:

  • If a better deal comes along during your fixed period, you may find that your rate is no longer competitive.
  • The interest rate for a ten year fix will probably be higher than, for example, a two year fix.
  • A lot can change in ten years, and you may simply feel that it's too long to commit to.
  • Although most fixes are portable, taking out a fixed rate deal that isn't could cause you difficulties if you need to move house.

One reason to keep your fix short?

One big issue with a long fix is that you could find yourself missing out on the rewards of owning more equity in your home.

Say you take out a ten year fix now, at an LTV of 70%. If the value of your property goes up and you keep making your repayments, in a few years time you could find yourself owning 40% of the equity in your home, pushing you into the 60% LTV band. Remortgaging at this point could allow you to access a better rate than the one you fixed on, but you would be unable to do so without facing substantial fees.

If you're close to the edge of an LTV band, you could consider taking out a shorter fixed rate now (to protect yourself from a rate rise) and then take out a longer fix when you own more equity.

The best of both worlds?

If you want the certainty of a ten year fix but don't want to be tied down for a decade, recent innovations in the mortgage market could help you out.

TSB's new 10 Year Fix and Flex mortgage offers a fixed rate for ten years, with the ability to leave after just five. This means that in five years time, if something better comes along, you're free to leave with no financial penalties. On top of this, there's no arrangement fee.

To find the best fixed rate mortgage for you, compare deals from across the market today.

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