MortgagesMar 23 2015

Mortgage spotlight: 10-year fixed rate mortgages

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Mortgage spotlight: 10-year fixed rate mortgages

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to offer 2.89 per cent (2.79 per cent to existing borrowers) at 60 per cent LTV (due to rising swap rates this was withdrawn for new customers and is available to existing customers only).

Popular

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.

These longer term deals look attractive and have attracted much publicity. But while borrowers are interested and approaching advisers to talk about 10-year fixes, they are not necessarily taking them up in droves. “When you explain the ramifications, people often realise that it’s not for them,” says Mr Murphy. “People often joke that they don’t know what they’ll be doing that evening, let alone in five or 10 years’ time.” As he explains, UK borrowers have a fairly short timespan when they think about mortgages.

Rates and penalties

While the rates are attractive, the early redemption penalties are less so and there may be a lack of portability and flexibility if the borrower wants to move house mid-term. The early redemption charges (ERCs) are usually applied on a tapering basis, so they reduce the longer the borrower holds on to the mortgage. Barclays and Nationwide, for example apply similar ERC structures; Barclays charges 6 per cent in the first seven years reducing to 3 per cent in the subsequent years of the term, while Nationwide charges 7 per cent in the first four years and then reduces the charge by 1 per cent each year for the remainder of the term. Perhaps most attractive in terms of flexibility is TSB’s offering, which effectively treats the mortgage as if it were a five-year term with the charge reducing from 5 per cent in year one down to 1 per cent in year five with no penalty applying thereafter (see Table).

Mr Murphy suggests such products are likely to be most attractive to borrowers remortgaging for the last time or downsizing. However, while these deals may stir the interest of borrowers, for many a commitment of 10 years is a step too far. The fact there are not actually that many products reflects lenders’ understanding that most borrowers will be reluctant to commit for so long. The number of 10-year products has increased from 12 in November 2012 to 51 two years later. However, the swap rates that helped fuel the launch of more of these products are on the way up, so there may not be any more record breaking rates for a while. As Money Management went to press, Santander withdrew its 10 year mortgage product fixed at 2.94 per cent refusing to be drawn on whether it would come out with a new product or was simply pulling out of the 10-year market altogether.