A 10-year fixed rate mortgage with (wait for it…) no exit penalties after 5 years
Hard to believe, but true. Lock in that rate, but change your mind halfway through if you find you could get a more competitive rate elsewhere.
If you’re buying a home you expect to stay in for five to 10 years or more, locking down the best rate you can currently get for a full decade ahead is an attractive proposition.
With the property market reacting to Brexit uncertainty, the busiest activity is now in remortgaging rather than new purchases.
“Borrowers are rushing to secure deals that will see them through Brexit and beyond,” says Janice Barber, mortgage manager at Yorkshire Building Society (YBS).
Yorkshire have just released figures showing a 44% increase in the number of borrowers taking out longer-term fixed mortgages.
Rates on the longest-term fixes will usually be higher than for two or five-year fixed terms. But in an uncertain market many homeowners put a higher value on certainty, and knowing what their mortgage repayments will be over the long-term.
You don’t have to go shopping around again in two or five years’ time to find a new deal that avoids your mortgage reverting to your lender’s standard variable rate (SVR) – which is usually more than double what you’ve been paying.
And you avoid paying for another valuation and another product fee when you arrange a new mortgage, which can add up to between £1,000 and £1,500 in costs each time.
Who benefits the most
- Borrowers with a low LTV
- Home-owners who’re going to stay put
The borrowers who stand to gain the most are those who have already own a bigger stake in their home (that is, a lower loan-to-value, or LTV).
A lower LTV wins you a lower interest rate. Over time a borrower who started out with a higher LTV should be making a significant dent in the amount of capital they’re borrowing, and if you remortgage after five years or so you should find you’re able to access better interest rates. But if you’re locked in for 10 years you won’t be able to access potentially cheaper deals.
The other group who suited long-term fixed deals were traditionally owners who knew they were going to stay in this home for the full period of their fixed-rate mortgage.
And that’s because of those hefty penalties: the Early Repayment Charges (ERCs) which were conventionally attached to long-term fixes, to discourage you from cancelling early.
Typically there might be a 5% fee if you quit within the first five years, dropping to 4% in year six, 3% in year seven and so on.
That means that on a £160,000 mortgage, you could face an £8,000 charge if you had to redeem it halfway through. Which is why the early-exit option on a competitively-priced 10-year fix is a winner.
Check the flexibility
To get around the fact that not many homeowners could be certain they’d want to stay in the same home for 10 years, many lenders made their 10-year deals portable. Or, portable so long as you were still wanting to borrow the same amount on the next home you were buying.
If you were trading up, most lenders would require you to take out a separate mortgage for the top-up sum. Which means more fees and admin.
Having an each-way bet
Which is why the option of penalty-free get-out from a 10-year fix after five years is a really attractive proposition.
- If rates have moved down, or your reduced LTV could put you in a lower rate-band, you can cancel out without paying through the nose.
- But if rates have moved up, you can stay put, and be relieved you don’t need to be remortgaging just yet.
Not many of the 10-year fixes offer this option, so check the conditions and choose the deal that suits you best.