10 year fixed at 2.99% from Woolwich

Posted on 8 January 2015 by Ray Boulger

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10 year fixed at 2.99% from Woolwich

Woolwich has today launched the cheapest ever 10 year (to 31/3/25) fix: 2.99%. It is available for LTVs up to 60%, has a fee of £999 and a maximum loan size of £1m. As well as purchases and remortgages it is also available for product transfers and further advances and on remortgages a free valuation and free legal fees are available. Woolwich offers many of its fixed rates over £1m at the same rate but with a larger fee. However, it has chosen not to offer this fixed rate for loans above £1m.

The previous rate on this already competitive mortgage was 3.45% and so, although dropping the rate below 3% obviously has huge psychological value, it is a big move. To provide some background to how Woolwich has been able to make such a large cut we only need to look at recent movements in the gilt market.

Lenders make very few price changes over the Christmas period but during this time gilt yields, and hence swap rates, have fallen sharply. For example, a week before Christmas the 10 year gilt yielded 1.87% and today it is 0.23% lower at 1.64%.

2.99% is superb value for a 10 year fixed rate for those with 40% deposit or equity, provided they are confident of staying in their property for the whole 10 years. Like most mortgages, this fixed rate is in theory portable, but because one of the conditions for porting the mortgage is that one has to meet the lender’s criteria at the time of moving home there is a risk of incurring the very high ERC if the lender declines an application to port.

The further ahead one tries to look the more difficult it is to be confident of where interest rates will be and so having one’s mortgage fixed at sub 3% for as long as 10 years provides comfort for a long time, not only for those worried about rate rises but also just in terms of making it so much easier for household budgeting.

I doubt we will see a cheaper 10 year fixed rate, except perhaps if another lender decides to undercut it by a tiny margin. However, despite the excellent rate I would advise holding off a short while, unless time doesn’t permit, because most lenders haven’t yet reacted to the recent fall in the cost of funds and we are likely to see more rate cuts.

In particular TSB and Santander previously undercut Woolwich’s 10 year fix by 0.01% (3.44% v 3.45%). Like Woolwich on remortgages Santander offers a free valuation and free legal fees; on purchases Santander also offers a free valuation. Santander’s fee is virtually the same as Woolwich’s at just under £1,000, whereas TSB does not charge an arrangement fee. 

However, the really big plus with TSB’s 10 year fix is that it’s ERC is much more consumer friendly. Woolwich’s ERC is 6% for the first 7 years, reducing to 3% in the last 3 years; Santander’s is 6% for the whole 10 years; TSB only charges an ERC for 5 years and it is on a sliding scale - 5/4/3/2/1% in the first 5 years. Having an ERC for only 5 years addresses the biggest reason many borrowers won’t consider a 10 year fix.

If TSB responds with a similar rate but with ERCs for only 5 years it would be a strong contender for mortgage of the decade. In fact I think with a rate as low as 2.99% there is a strong case for the mortgage being offered with no ERCs. Borrowers are unlikely to redeem a long term fix at this rate except out of necessity, say if they were selling the property.

A lender prepared to offer an ERC free 10 year fix at 2.99%, even with a slightly bigger fee, would get a great reaction from borrowers and keep their customers much longer than normal in the mortgage market. Not only that they would not be required by the regulator to apply a stress test in the affordability calculation, as this is not required on fixed rates of 5 years or longer. Lenders would be unlikely to consider it prudent to assess affordability at 2.99% but there would be a strong argument for stressing at a lower rate than currently required by The Financial Policy Committee.

This might encourage more borrowers to take a 10 year fix and thus significantly reduce the risk of them struggling to meet their mortgage commitments for 10 years. The Financial Conduct Authority should see this as a real positive as affordability is its key mantra, although on the downside improved affordability might push house prices a little higher than they would otherwise have been.

One way of assessing a 10 year fix is how much higher the rate is than on a comparable 5 year fix. Woolwich has cut its cheapest 5 year fix to a market leading 2.39% (available up to 65%), albeit with a £1,999 fee, and so buyers of the 10 year fix are paying an extra 0.6% for 5 years in exchange for the certainty of a 2.99% rate in the second 5 years. Value is partly from the peace on mind this brings but in mathematical terms the 10 year fix will work out cheaper unless a 5 year fixed rate can be bought at around 3.59% or cheaper in 5 year’s time.

One other point worth highlighting is that Woolwich has not cut the rate on its 10 year fix up to 75% LTV, which was, and still is, at 3.99%. Nationwide already undercuts this at 75% and in any case a 1% interest rate differential on a 10 year fix between 60% and 75% is ridiculously high. The cheapest 5 year fix up to 75% LTV is 2.69% (from Leeds), only 0.3% higher than the cheapest 5 year fix to 60% LTV, which is a reasonable margin. Thus, there is a particularly strong reason to wait for better deals for anyone with a deposit, or equity, of less than 40%.

A word of warning for those with 2 homes who might want to sell the property with this mortgage and move into the other one. Unlike some other lenders Woolwich refuses to allow its mortgages to be ported to a new home which is already owned.

On a repayment mortgage the lower the interest rate the higher the proportion of monthly payments consists of capital repayments. Taking a £200,000 mortgage and a 25 year term as an example, at 2.99% £62,700 will be repaid during the 10 years, whereas at 3.45% only £60,200 would be repaid.

DISCLAIMER

The views expressed here are those of the author and do not necessarily represent or reflect the views of John Charcol Ltd

Categories: Property market, Bank of England, Mortgages, Personal finance, Regulation, House and home, Interest rates, Remortgaging

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