Mortgage spotlight: 10-year fixed rate mortgages

Mortgage spotlight: 10-year fixed rate mortgages

March 2015 saw the sixth anniversary of the introduction of the lowest ever Bank base rate in the UK. Borrowers are seeking to prepare for the inevitable rise by fixing their mortgage deals. Meanwhile, the rate war that began towards the end of 2014 has continued, leading to record new lows.

The two factors have combined, resulting in some of the lowest ever 10-year fixed rate deals the UK has seen.

It began in January when Woolwich and Barclays offered the first sub-3 per cent 10-year fixed rate mortgage at 2.99 per cent available up to 60 per cent loan to value (LTV) with a fee of £999. It wasn’t long before it was undercut by Nationwide with 2.94 per cent (2.84 per cent for existing borrowers) at 60 per cent LTV. Then came First Direct at 2.89 per cent and 65 per cent LTV. Other offerings include 2.94 per cent from Santander (70 per cent LTV) and Barclays further rate reduction also offering 2.94 per cent but at 60 per cent LTV. Most recently Nationwide cut its rates further to offer 2.89 per cent (2.79 per cent to existing borrowers) at 60 per cent LTV (due to rising swap rates this was withdrawn for new customers and is available to existing customers only).

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So just how popular are such deals likely to prove in a UK mortgage market that has traditionally been fuelled by shorter term deals, typically of two or three years’ duration. While Brian Murphy, Head of Lending at the Mortgage Advice Bureau, suggests demand is not that great, he says that people are more happy to commit to five-year deals now than they were a couple of years ago. It’s not that the great British public has suddenly gained an appetite for looking into the future, but it’s been driven by a factor that has always affected the mortgage market, the fall in pricing. And pricing of course has been driven by swap rates which have been falling, allowing some of the most competitive rates ever over all mortgage terms.

A few years ago, the differential between two-, three- and five-year deals was significantly greater. Generally, the longer the mortgage term, the more you paid for the product. Since then there has been a compression in the market and now longer term deals are cheaper. As

Mr Murphy says, if you’ve had a mortgage for six years or longer, you will have been used to rates in the past of 4 per cent, 5 per cent and 6 per cent upwards. In April 2012, according to Moneyfacts, the average two-year fixed rate mortgage was 4.6 per cent and the average five-year fixed rate was 4.82 per cent. Now borrowers are looking at five-year deals of 2 per cent and 2.5 per cent. And 10-year deals under 3 per cent have never been seen before.

Such deals could potentially see borrowers through to the end of the next two parliaments.

The other advantage is that lenders are not required to apply the stress test to affordability. It is not applied to deals over five years because borrowers know what they will be paying for 10 years and will therefore not be subject to the vagaries of the market.