Price cuts on 10-year fixed rate mortgages have cut the cost of long-term security by more than £3,500 for the average borrower over the last year, effectively saving them five months of repayments or giving them nine months ‘interest free’, according to new analysis by mortgage broker Private Finance.
However, with the average 10-year fixed rate rising by 23 basis points (bps) between October and December 2016, homebuyers may have to move fast to secure the best savings and give themselves peace of mind in the face of economic uncertainty and growing speculation about a future base rate rise.
Private Finance’s analysis shows a borrower with the average £150,000 loan would have saved £30 a month or £3,595 over the fixed term by locking into a 10-year deal in December 2016, compared with a year earlier, as a result of average rates falling by 38 bps from 3.36% to 2.98% during that time.
The saving of £3,595 over 10 years is equivalent to five months of repayments at the old, higher rate of 3.36% (December 2015) or more than nine months of interest repayments.
Table: Cost of a 10-year fixed rate mortgage falls annually:
| Loan size | Interest rate | Monthly repayment | Fixed term repayment | |
| £150,000 | Dec-15 | 3.36% | £740 | £88,766 |
| Dec-16 | 2.98% | £710 | £85,171 | |
| Difference | 38 bps | £30 | £3,595 | |
| £1,000,000 | Dec-15 | 3.36% | £4,931 | £591,720 |
| Dec-16 | 2.98% | £4,732 | £567,840 | |
| Difference | 38 bps | £199 | £23,880 |
Source: Private Finance/Bank of England. All figures are rounded to the nearest £1.
Sustained downward pressure on mortgage rates means that long-term fixed rate deals now cost less than two and three-year fixed mortgages did in 2011. In December 2011, the average two-year fixed rate stood at 3.22%, which would have resulted in average monthly repayments of £729 on a mortgage balance of £150,000. This is more than the cost of a 10-year fixed rate deal taken out at the end of 2016, which stood at £710 a month on a 2.98% average rate.
Shaun Church, director at Private Finance, said: “The option of fixing your interest rate for a decade has very much sat at the fringes of the UK mortgage market, but today’s ultra-low interest rate environment means 10-year fixes are now less than short-term fixes were just a few years ago. With loan terms getting longer and people moving house less often, it seems counter-intuitive that fixing the price of their loan for a much shorter period of time remains the default option for many consumers.
“In the right circumstances, fixing for longer can have several major advantages. For one, borrowers are insulated from the rate rises that they might otherwise be exposed to when their short term deals end. For many, the additional cost of a long-term deal is a small price to pay for extra peace of mind, particularly when rates are at historic lows and there is a growing sense of uncertainty about the long-term outlook for household finances and the economy.
“It is important that borrowers seek advice to weigh up all their options, but lenders can also do more to make 10-year products more appealing. Despite the fall in rates, the 10-year market is nowhere near as competitive as that for shorter-term fixes, where lenders have been known to undercut one another with sub-1% deals. The psychological barrier of locking in for a decade would also be reduced if lenders offered greater flexibility on remortgaging costs and break points within the fixed term, in case personal circumstances change.”
In recent months however, Private Finance’s analysis shows 10-year fixed rate deals have been getting more expensive for borrowers. In October 2016, the average 10-year fixed rate reached a record low of 2.75%: resulting in monthly repayments of just £692 a month for someone with a £150,000 loan. A borrower fixing in October 2016 would therefore have saved themselves £2,131 over a 10-year term mortgage term compared with December.
The price difference between 10-year fixes and two, three or five-year fixes has also increased in recent months, pushing up the monthly ‘security premium’ for longer-term borrowers. In December 2015, the average borrower with a £150,000 mortgage would have paid £111 more each month as a result of fixing for 10 years instead of two; £85 more than if they opted for a three year fix; and £48 more each month than if they fixed for just five years.
In December 2016, the monthly ‘security premium’ for a 10-year fix reached £115 compared with two-year fixes; £89 a month compared with three-year fixes; and £55 a month compared with five-year fixes.
However, these incremental increases can still look modest when compared with the certainty and peace of mind that comes with a decade-long fixed rate. For example, paying £55 a month extra for a 10 year rather than a five-year fix amounts to just £11 a month for every extra year of security.
Falling rates in the last year have also made 10-year fixed-rate mortgages even less expensive than the average Standard Variable Rate (SVR) over the past year.
A borrower with a £150,000 loan in December 2015 would have been £93 better off each month on the average 10-year fixed rate (3.36%, with monthly repayments of £740) than on the average SVR (4.49%, with monthly repayments of £833). This monthly saving increased to £105 by December 2016, with the fall in average 10-year fixed rates (to 2.98%) resulting in monthly payments of £710, compared to £815 payments on a typical 4.23% SVR.
Church added: “It appears that average 10-year fixed rate deals bottomed out in October 2016, and borrowers looking to fix for the long term might never have it so good again. Although prices remain historically very low, the monthly ‘premium’ on a 10-year deal compared to shorter deals is already creeping up.
“However, one big advantage that borrowers with a 10-year fix have over shorter-fixers is that they are unlikely to find themselves on their lender’s SVR anytime soon. SVRs are typically much more expensive than fixed-rate deals, providing lenders with little incentive to move borrowers off them.
“Of course, while 10-year fixed rates offer predictability, they are not the perfect product for every borrower. Different borrowers have different needs, and some would benefit from the greater flexibility or initial affordability that a short-term fixed offers. We would always advise borrowers considering their options to seek independent mortgage advice.”