Cost of ten-year fix deals creeping up

Cost of ten-year fix deals creeping up

Long-term borrowers are now able to save up to five months’ mortgage repayments due to falling interest rates.

Price cuts on ten-year fixed rate mortgages have reduced the cost of long-term security by more than £3,500 for the average borrower over the last year, according to analysis by independent mortgage broker Private Finance.

A borrower with the average £150,000 loan would have saved £30 a month, or £3,595 over the fixed term, by locking into a ten-year deal in December 2016, when rates were at 2.98 per cent.

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The saving is equivalent to five months of mortgage repayments at the old rate or over nine months ‘interest-free’.

Shaun Church, director at Private Finance, said: “The option of fixing your interest rate for a decade has very much sat at the fringes of the UK mortgage market, but today’s ultra-low interest rate environment means ten-year fixes are now less than short-term fixes were just a few years ago. 

“With loan terms getting longer and people moving house less often, it seems counter-intuitive that fixing the price of their loan for a much shorter period of time remains the default option for many consumers.”

But borrowers may need to act quickly to get a good deal, as ten-year fixed-rate deals have been getting more expensive.

The average ten-year fixed rate has risen by 23 basis points between October and December 2016, meaning a borrower fixing in October would have saved themselves £2,131 over a ten-year term mortgage term compared with December.

The price difference between ten-year fixes and two, three or five-year fixes has also increased in recent months, pushing up the monthly ‘security premium’ for longer-term borrowers. 

In December 2015, the average borrower with a £150,000 mortgage would have paid £111 more each month as a result of fixing for ten years instead of two; £85 more than if they opted for a three year fix; and £48 more each month than if they fixed for just five years.

One year later, the monthly ‘security premium’ for a ten-year fix reached £115 compared with two-year fixes; £89 a month compared with three-year fixes; and £55 a month compared with five-year fixes.

Yet a decade-long fixed rate has a major advantage in terms of peace of mind, while falling rates in the last year have also made ten-year fixed-rate mortgages even less expensive than the average Standard Variable Rate.

Mr Church added: “Of course, while ten-year fixed rates offer predictability, they are not the perfect product for every borrower. 

“Different borrowers have different needs, and some would benefit from the greater flexibility or initial affordability that a short-term fixed offers. 

“We would always advise borrowers considering their options to seek independent mortgage advice.”