Long term fixed rate mortgages were in plentiful supply a few years ago, with Manchester Building Society even offering a 30 year deal fixed at 5.39%. But the credit crunch put a stop to all that with 5 years generally becoming the longest period lenders were willing to fix mortgage rates.
Yorkshire Building Society (YBS) has bucked the trend with its new 10 year fixed rate mortgage. The rate is fixed at 4.99% until 31 July 2020, after which it reverts to YBS’s standard variable rate (currently 4.99%).
The maximum amount you can borrow is limited to 75% of the property value, reasonably generous in the current climate, with a minimum £25,001.
Fees are reasonably steep with a non-refundable £195 application charge and a further £800 completion fee, which can be added to your mortgage. Beware that adding fees to a mortgage means the lender simply earns even more money by charging you interest on the charges. In this case the £800 would end up costing you more than £1,250 over 20 years assuming 4.99% interest throughout - better to pay upfront if you can.
The rationale behind fixing rates for such a long period is certainty. A fixed mortgage payment means you can sleep peacefully even if interest rates soar over the next 10 years, although you might get a shock thereafter when the mortgage converts to a variable rate. But if interest rates remain low you could end up paying well over the odds.
A £200,000 interest only mortgage at 4.99% would cost you £832 per month, whereas opting for YBS’s 2 year 2.89% fixed rate would only cost £482. So at current rates the peace of mind offered by the 10 year rate is costly - an extra £4,200 a year in this example. Of course, if interest rates soar you could end up quid’s in, but I think there’s a good chance they’ll stay low for a few more years yet.
If you want to switch elsewhere during the first 10 years you could pay a high price - early redemption penalties start at 7% over the first three years and progressively fall to 1% in the final year. Don’t consider this mortgage unless you’re pretty sure you’ll hold it for close to 10 years.
You can overpay up to 10% of the mortgage each year without penalty, but above this redemption penalties kick in. There’s also a final £90 fee when you eventually redeem the mortgage.
Interest is calculated daily, which is a good thing if you opt for a repayment mortgage as any payments you make reduce the interest charged straight away.
Is this mortgage a good idea? Well it’s hard to know without a crystal ball. At the time of writing 10 year gilt yields are about 3.5%, suggesting the market believes interest rates will rise from their current level (0.5%) over the next 10 years, but not by that much. Of course, it’s not unknown for markets to be wrong, but for as long as our economy is depressed (which could be several years) I think it’s unlikely we’ll significant interest rate hikes (because this would stifle recovery).
I’d take the view if you want peace of mind and/or can’t be bothered to shop around for a decent mortgage rate every few years then this isn’t a bad deal.
But I think it’s likely you’ll probably do better overall opting for a good discounted variable rate/tracker or short term fixed rate mortgage, re-mortgaging if necessary to ensure a competitive deal over 10 years. Yes, you might pay fees and endure some hassle when re-mortgaging, but the potential savings could make this worthwhile.