Are Britain’s mortgage borrowers ready for the decade-long fix? Banks and building societies seem to think so, as they have been rushing out 10-year fixed-rate mortgage deals. On Tuesday, Santander launched its “lowest-ever” 10-year mortgage, where monthly payments are fixed at 3.44%. Hours later, TSB waded in with its own “market-leading” 10-year fixed deals, with rates starting from 3.44%.
However, while the Santander loan comes with a £995 fee and ties in borrowers for the full 10 years, the TSB deals have no product or application fees, and enable customers to refinance or leave the mortgage after five years without having to pay an early repayment charge.
Plunging inflation and a growing expectation that interest rates will stay low for longer are part of the reason why we are seeing what data provider Moneyfacts calls an “explosion” of 10-year fixes, with many of the deals priced at historically low levels.
Inflation fell to 1% in November, down from 1.3% in October, and the lowest in 12 years, according to the Office for National Statistics. The fall sparked speculation among economists that the first rise in interest rates, anticipated some time in 2015, may now not happen until 2016.
Ultra-low money market rates are enabling banks and building societies to offer decade-long mortgage deals at prices not seen before. Sylvia Waycot at Moneyfacts says the number of 10-year deals has jumped from just 12 in November 2013 to more than 50 today.
The Santander deal is for homebuyers with a 40% deposit – the maximum loan as a proportion of the property’s value (LTV) is 60%. Buyers will receive a free valuation, though there is a £995 booking fee. Santander 1-2-3 current account holders who pay their Santander mortgage by monthly direct debit will receive 1% cashback (the maximum monthly mortgage payment that qualifies for cashback is £1,000).
The Santander deal jumped ahead of a 3.45% rate from Woolwich, but mortgage expert Ray Boulger at broker John Charcol advised borrowers to wait for even better rates in the coming weeks. “The 10-year gilt is down from 2% to 1.71%. We can now expect to see further cuts in five and 10-year mortgage rates,” he says.
TSB’s range of 10-year fixes announced on Wednesday, called Fix and Flex, are priced from 3.44%, although that rate is only for those borrowing up to 60% of their property’s value. The rates then rise: from 3.49% for someone borrowing between 60% and 75% of the property’s value, to 4.74% for someone borrowing between 85% and 90%.
The rates for those remortgaging are slightly different and start at 3.49% for those with equity of 60% or less.
TSB says it understands that people’s lives change – “families grow, children leave home and people relocate for new jobs” – so its Fix and Flex products offer customers the ability to leave the mortgage deal after five years without charge, making the loans more flexible than many rival offerings. The Santander deal, for example, carries a 6% early repayment charge for the full 10-year term.
But if interest rates are unlikely to rise, possibly for two years or more, is there any point in borrowers taking out a fixed-rate home loan? Boulger says: “You might end up paying 0.5% more for your mortgage, but a lot of people will be happy with that, as it’s still good value and people want to be able to budget for the longer term.”
Of course, a 10-year fixed deal will probably cost more per month than a two- or five-year one. However, Waycot points out that a borrower who keeps plumping for a two-year fixed rate will have had five deals – and five sets of setting-up fees – in the time it will take for one 10-year deal to expire.
But she adds: “When considering a 10-year fixed rate, it is important to make sure the deal is portable, as you may need to move to a bigger or smaller home in the future and you won’t want to incur early redemption fees, which can be high.”
