The mortgage market has been transformed over the course of the last year and recently there seems to have been a steady stream of more upbeat news. That has predominantly focused on the falling mortgage rates, especially fixed rate deals which have plummeted to record lows. Even now, mortgage lenders continue to jockey for position and nibble a touch more off their rates in order to claim the lowest rate on the market.
As fixes have continued to fall they have even undercut many of the Base Rate tracking deals, removing the traditional dilemma for mortgage borrowers. With Base rate at such a low and highly unlikely to fall any further, there is no upside to taking a variable deal and consequently borrowers have been flocking to the low fixed rates.
In fact the only dilemma now is how long to fix the rate for, with options ranging from the shorter term 2-year fixed rate deals all the way to 10 years. Although the number of longer-term fixed deals remains relatively few compared with the ever popular 2 year fixed rates there have been a few more lenders dipping their toe in that end of the market.
Locking into a fixed rate mortgage at the bottom of the rate cycle sounds like a sensible move, defending against future rate rises that surely must come at some point. But the popularity of ten-year fixed rates remains relatively muted and borrowers remain cautious, primarily for two reasons.
Firstly, the shorter the term of the fixed rate, the lower the interest rate on offer and inevitably some borrowers will go for price. A keenly priced 2-year fix can offer rates below 2% in the current market versus ten-year deals dipping slightly below 4%. The danger in taking a short-term deal is that the Base Rate could have already increased in two years forcing a move to a higher rate.
Secondly and most importantly is the fact that long-term deals impose early repayment charges throughout the fixed rate period. So it does mean that breaking away from the fix could come at substantial cost, with early repayment charges that can amount to 6% or more of the mortgage balance.
Although these products will typically be ‘portable’ and can be taken to a new property, there is no guarantee that the lender will advance more funds if moving to a bigger property, for example. This long term commitment can be what many borrowers struggle with and as a result many are opting for a shorter horizon.
Ten year deals can be great for the right borrower and there is plenty of appeal in knowing where you stand for what could be the remainder of the mortgage term. However, many are seeking a compromise option and plumping for a 5 year deal.
They are not a great deal more expensive than the shorter fixed deals, over a time frame that the borrower feels more comfortable with and still offering some protection against rate rises in the medium term. Time will tell if there could yet be a further shift to longer term deals as the number of products gradually increases.