The invasion of long term fixed rates
Posted on 13 November 2014
Just a year ago there were only five. Nowadays there are least twenty and counting.
The number of 10-year fixed rate mortgages has increased by 300% over the last year. And not only are there more of them, but the 10-year fixed rates have also become extremely competitive. At present the lowest starts from 3.19% which is 2% less compared to the lowest 10-year fixed rate back in October 2013.
The mortgage market in the UK is in need of product innovation and re-balancing after too much attention has been traditionally placed on 2-year deals with a myriad of products available up to 95% loan to value. Capped rates have slowly disappeared and became obsolete when the fixed rates started to reduce. Hybrid deals appeared for a short space of time offering both the benefit of low tracker rates for a couple of years followed by competitive fixed rates for further 3 years, only to quietly step aside and vanish.
The invasion of the long term fixed rates is set to continue with Nationwide being the latest to join the trail of lenders offering a 10-year fixed rate deals available up to 85% loan to value. The existing products on offer include 90% mortgages from Skipton Building Society. With the increased supply of long term fixes and the apparent competition between the banks, we should ask in expectation – are 15-year fixed rates on the horizon?
But first, is there a demand for 10-year fixed rates?
As a mortgage broker, I am beginning to receive more and more enquiries where clients weigh up the benefits and drawbacks of taking a 5-year fixed against 10-year fixed mortgage. And while there is a certain willingness to consider both options, the prospect of paying 1% or more for the privilege of fixing the rate for a long term seems to deter a lot of people. If they take out a 5 year fix with a lower rate, then the option is there for them to overpay their mortgage by 1% per annum and in effect reduce their loan to value by 5% over 5 years.
The other factor to consider is the Early Repayment Charge or ERC. While banks in the US (where long term fixed rates have been a common occurrence), are discouraged to charge penalties for early settlement ,the lock-in periods in the UK and Europe traditionally last for the term of the mortgage with very few exemptions. The typical ERC will be 5-7% of the outstanding loan amount in the first 3-5 years, reducing by 1% in the years after until year 10. For many people this proves to be a big deterrent.
The mobility in the mortgage market is constantly changing and with many families expecting to relocate typically due to job, school or family needs, they see taking a 10-year fixed rate a great chance to secure their payments for a long term but also a great gamble due to the extortionate penalties during the term. Even the option to port their mortgage cannot give them piece of mind as porting is normally subject to the lending terms and conditions at the time of porting, i.e. it is a privilege not a guarantee.
The current window of opportunity represents a great chance to protect mortgage payments for a long period of time but this has been hindered by heavy exit charges and unless lenders come up with fairer structure, the uptake will be disappointingly low. But every case is different, and as these 10 year fixes are now more readily available, you should talk with your mortgage broker to find out if they might work for you.
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This article is for information only and does not constitute advice. Please obtain professional advice before taking out a mortgage. Your property may be repossessed if you do not keep up repayments on your mortgage, or any debt secured on it.
All information is correct at date of publication.
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