- Borrowers can fix mortgage payments for ten years at rate of just 3.04%
- But many homeowners will not stray beyond a ten-year fixed rate
- Saving on a five-year vs ten-year deal is £43 per month
Millions of homeowners are missing out on the chance to lock into attractive low mortgage deals that last a decade.
While the amount being borrowed for home loans is rising each month, the majority of buyers are ignoring a glut of ten-year fixed deals.
With interest rates widely expected to go up next year, some providers are already pulling their best rates.
Nationwide announced yesterday that the rates on its best ten-year mortgages were going up by 0.1 per cent.
Golden opportunities: While the amount being borrowed for home loans is rising each month, the majority of buyers are ignoring a glut of ten-year fixed deals
Yet those with a 40 per cent deposit could still lock into an interest rate of 3.04 per cent with TSB for a decade if they act now.
Monthly payments on a typical £150,000 25-year mortgage would be £714.44, with the total cost including fees of £995 over the ten-year period being £39,895.
Those with 25 per cent to put down can secure a slightly higher rate of 3.19 per cent with the same £995 fee.
Despite these low interest rates, buyers are sticking to five-year deals in a bid to bring down their monthly repayments.
The best five-year fixed rate for a buyer with a 25 per cent deposit is 2.48 per cent, which would make the monthly payment on the same loan £671.42 — shaving off £43 a month.
David Hollingworth, director at London & Country mortgage broker, says: ‘With almost a 1 percentage point difference between the best ten-year and the best five-year mortgage rate, homeowners are always going to go for the shorter, cheaper deal to bring down their monthly repayments, regardless of whether that is the better decision in the long run.
‘It will take more of a difference in rates before house-buyers turn to longer deals.’
Currently, it is estimated that only around 2 per cent of mortgages being taken out are for ten-year fixed-rate deals.
Yet as interest rates continue to remain at historic lows, the number of ten-year mortgage deals available has soared.
Three years ago, in 2012, there were only 17 available to buyers, at a typical rate of 4.78 per cent.
Today there are 108, with an average rate of just 3.54 per cent. But these deals won’t last for ever.
The Bank of England is widely expected to raise the UK’s base rate of interest from 0.5 per cent next year, although probably not until May or June.
If that happens, mortgage rates will quickly follow. It is particularly bad news for any homeowners on their provider’s standard variable rate because these can be changed with no notice.
Borrowers who don’t fix for the long term now could be storing up problems for the future.
If the variable mortgage rate rises by just 1 per cent, it will add an extra £105 to the typical monthly household mortgage repayment.
Charlotte Nelson, finance expert at Moneyfacts, says: ‘Borrowers have often considered a five-year fix as long term, but reconsidering this view and committing to a low-rate ten-year fix may pay off when base rate does rise.
‘Those who lock in now can rest assured that their repayments won’t go up until at least 2025.’
The Bank of England’s November Inflation Report outlined the expected path for Bank Rate to 2018
According to figures from the Council for Mortgage Lenders, homebuyers borrowed £20 billion on their properties in September this year. That is an increase of 12 per cent on the same month last year.
Some 62,300 home purchase loans were made in the month, with a further 31,000 remortgage loans.
But anyone who is considering a ten-year mortgage must be sure they won’t need to get out of it ahead of time, because these deals come with hefty early repayment charges — and that is what has often put off homebuyers.
If you want to leave early, Nationwide charges you 7 per cent of the balance of the mortgage in the first four years (so £14,000 if you want to leave a £200,000 loan early), which is reduced by 1 per cent a year for the rest of the term.
Woolwich charges 6 per cent until 2023, and then 3 per cent for the rest of the term.
TSB, however, offers buyers the chance to break out of their deal after five years.
Ms Nelson adds: ‘With these fixed-rate mortgages cheaper than ever before, borrowers will have to weigh up the odds and assess whether the gamble will pay off.’
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