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Should you lock in for a decade as 10-year mortgage fix now cheaper than a two-year?

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08/09/2022
Nationwide has repriced its mortgage range, with 10-year deals now cheaper than the two-year equivalents. But is it worth the long-term commitment?

The UK’s biggest building society this week updated mortgage rates across selected fixed term products and varying Loan to Value (LTV) ranges.

Following the changes, it means borrowers can get a cheaper rate for a 10-year fixed mortgage than for a two-year deal.

As an example, a new borrower (85% LTV) taking a fee-free 10-year mortgage deal with Nationwide is offered a rate of 4.24%. If they were to take out the equivalent two-year deal, they would see the rate rise to 4.79% – more than 50 basis points higher.

On a £200,000 mortgage over a 25-year term (capital and interest), Moneyfacts calculations reveal homeowners taking out the 10-year deal would pay £1,082.36 a month, while those opting for the two-year fix would see monthly mortgage payments at £1,144.84 – £60 a month more.

Mortgage experts react: ‘Unbelievable’, ‘uncharted’, ‘win/win for lenders’

Typically, two-year fixed mortgage deals have tended to be more competitive than the three-year, five-year or even 10-year counterparts.

Mike Staton, director of Staton Mortgages, explains: “In the past, two-year fixed rates have provided less stability to applicants therefore lenders charged cheaper rates for these.

“Now we are seeing a complete 180 by the lenders and the five- and 10-year fixed options are becoming cheaper.”

In May, the gap between the average rate for a two- and five-year fixed mortgage narrowed to its smallest level since February 2013, but brokers and advisers say this latest development in 10-year fixed rates is something new.

Joshua Gerstler, chartered financial planner and owner of The Orchard Practice, says: “It is unbelievable that you can fix your mortgage for 10 years at a lower rate than you can for two years.”

For Jamie Lennox, director at Dimora Mortgages, this change is “uncharted waters we’re sailing into”, while Staton adds this is the first time in his two-decade career as a mortgage adviser that he’s seeing 10-year fixed rates cheaper than two-year deals.

He says: “I think it’s a great business opportunity and I feel they [lenders] see it as a win/win situation. Should interest rates drop within the 10-year period, we will see customers paying more on these fixed rates than what will be available on the market.”

Should you lock in to a 10-year mortgage fix?

Economic consensus suggests the base rate (which impacts mortgage rates) could reach 3% by the end of the year, which will mean those on default tariffs as well as those looking to remortgage or take out a new mortgage will pay more each month.

As such, many will look at ways to minimise their monthly outgoings, particularly in light of the current cost-of-living crisis, which could include looking at a 10-year mortgage fix for the first time.

Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, says: “I can understand why some homeowners would find this tempting especially with the current market – inflation and rising interest rates – to provide some long-term security.

“However, the property market is forever changing, and you could fix at a higher interest rate than those that may be available in years to come. It is important to speak to an independent and whole of market mortgage adviser who can review all options with you, to review your current and future plans to determine what the best deal for your circumstances are. Don’t be tempted by the idea of long-term fixed rate security as this is likely to come back to bite you when your circumstances change in the future.”

According to Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, historically, there have been two issues with 10-year fixed rate mortgages.

“The first was always their cost. They were priced at a level that looked expensive when compared to a five-year fixed rate offering.

“While this has changed recently and the 10-year deals are now carrying less of a premium (if any at all), the second issue still holds – lack of flexibility”, he says.

Taylor-Barr warns that many 10-year fixed rates also come with “pretty hefty” early repayment charges for the full 10-year term.

“Many will still allow overpayments and be portable, but 10 years is still a long time and it’s very rare that the mortgage that’s right for you in 2022 will still be the mortgage that’s right for you in 2032”, he says.

He adds: “If I ask you to tell me what you think life will look like in two years’ time, you will no doubt have a pretty good idea, even in five years’ time you will have a fair idea of how things will go, but over ten years? That really is guess work for many people and seeing you need to pay a few thousand pounds to escape the mortgage if you guess wrong, that’s not a gamble many people are happy to take.”

This is echoed by Lennox, who says: “Naturally more and more people will now be wanting to fix for a long-term duration. For the average person, 10 years is an extremely long time to be tied into a mortgage and a lot can change in that period which really needs to be thought about before committing.”

He adds that if there is an appetite from customers for a 10-year fix, “more and more lenders will follow to gain a piece of this market share.”

And for Staton, the move by mortgage lenders to price 10-year fixes more competitively suggests “banks predict rates will drop.”

He explains: “If banks can encourage customers to sign up on 10-year deals, clients will potentially pay a huge early repayment charge to exit the mortgage if rates do drop.”

This is supported by Gerstler who says for those planning to stay in their current properties for 10 or more years, a 10-year fix is “something you should really consider”. But he adds that 10-year rates like these “imply Nationwide is expecting rates to be cheaper again in the future, so you could end up paying more over the 10 years, however, if you like security, it is a good deal”.

Meanwhile for Rob Peters, principal at Simple Fast Mortgage, 10-year fixes are “only suitable for older borrowers who are very confident they are not going to move again”.

He says: “Even then, it’s a roll of the dice, as we just don’t know what twists or turns life is going to take.

“Should circumstances change, and the loan needs to be repaid within the fixed term, it’s likely borrowers will be stung with a hefty penalty that would likely massively outweigh any interest rate saving had. It can be a great product in the right situation, but definitely one to approach with caution.”

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