Should you go for a ten-year fixed mortgage?

Ten-year mortgages have always been rare beasts in the UK. Most Britons have either gone for variable-rate mortgages – often linked to the base rate – or ‘fixed-rate’ deals where the rate is only fixed for two or three years.

However, other countries take a different approach. For instance, in Germany the market is split between variable-rate mortgages, medium-term fixed-rate mortgages and long-term fixed-rate mortgages. In America fixed-rate deals of 15 or 30 years are standard.

The good news is that banks have begun broadening the number of longer-term deals available in the UK. With long-term interest rates starting to drift upwards, these deals have become more expensive over the past few months. However, they are still relatively cheap compared to even a few years ago.

For instance, the latest Bank of England figures suggest that the average five-year rate at the end of May was 3.72%, compared to nearly 6% over the last two decades. Given that the economic recovery seems to be gaining momentum, increasing the pressure on a reluctant Mark Carney to raise rates, is it worth considering an even longer-term deal?

The one clear benefit of taking out a ten-year deal is that it gives you protection against rising interest rates. While Carney continues to give mixed signals about his intentions, he has suggested that rates could reach 2.5% within three years.

In the longer run, Sir Charlie Bean, the former deputy governor, has suggested rates could reach their historic average of 5% within a decade. If this is correct, then the Woolwich’s 3.99% rate for ten years looks like good value.

However, you need to be aware that ten-year deals also have some downsides. The market for them is still a tiny niche compared to the one for shorter-term deals. What’s more, ten-year deals tend to be limited to those with higher deposits.

The Woolwich deal is only available to those with at least a 30% deposit. Fixed-rate mortgages also typically come with a big fee (in Woolwich’s case £1,499), which makes them less suitable for cheaper properties.

Admittedly, Newcastle Building Society offers a no-fee ten-year deal where you only need a 20% deposit, but the headline interest rate is significantly higher at 4.49%.

The final downside of fixed-rate mortgages is that they have high early repayment fees. This is to prevent you from switching to a cheaper mortgage if rates subsequently fall. Given that rates presumably can’t go much lower, this may not be a major worry.

However, if you think that you may have to move house, it’s worth checking the fine print of your deal to see whether you can still keep your current deal. While Woolwich’s fixed-rate mortgages are portable, which means that you wouldn’t need to pay the initial fee again, you would still have to reapply and pay for a valuation.

Merryn

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