Woolwich has launched a 10-year fix with a rate of only 4.67%, one of the lowest long-term deals ever. It follows sub-5% deals from Halifax and the Nationwide, Norwich & Peterborough and Yorkshire building societies.
The cheap 10-year deals have appeared as long-term interest rates, as measured by the yields on gilts issued by the British government, have plumbed their lowest levels for decades.
Louise Cuming, head of mortgages at Moneysupermarket.com, a comparison website, said: “The low level of long-term interest rates, where 50-year gilts are at just 3.7%, is being reflected in the mortgage market, and 10-year fixed rate products are enjoying a revival.”
Mervyn King, the governor of the Bank of England, has said that he is puzzled as to why long-term rates are at such “remarkably low levels”, and has warned of the fall-out if they head back up again.
So should you snap up a long-term fixed rate now? It depends on your circumstances, according to mortgage brokers.
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While rates are undeniably attractive, you are likely to be locked into the deal for the term, which could cause problems if you wish to move home or your circumstances change.
Simon Tyler of Chase de Vere Mortgage Management said: “10-year fixes are fantastic value. If you are settled and have no plans to move for many years, then fixing your rate at these levels would be very wise.
“In an ideal world it would make perfect sense for everybody to take cheap, long-term fixes like this, securing affordable finance for their homes and removing the need to remortgage so often. But because you are tied in by punitive early-repayment charges for the whole 10 years, any change in circumstances means you could easily come unstuck and the cheap rate could backfire.
“It is generally better to take more flexible deals that allow you to switch your mortgage as you trade up the ladder.”
However, if you are confident that your circumstances will not alter much and do not want the hassle of remortgaging every few years, a long-term deal could be a good option.
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The Woolwich scheme is the best option. The rate is fixed at 4.67% and has an arrangement fee of £495, although borrowers who are remortgaging get a free valuation and legal fees.
You can make overpayments of as much as 5% of the value of the loan every year, but if you redeem your mortgage within the fixed period you will have to pay a penalty of 4% of the mortgage balance.
The deal is portable, meaning you can take it with you if you move house, but if you need to borrow more to fund your purchase you will be stuck with Woolwich. There is no guarantee that it will have any competitive rates. And if your circumstances have changed, you may no longer fit its lending criteria which would mean you would be forced to redeem your current deal and pay the penalty charge.
It is for that reason that advisers recommend shorter-term fixes or discounted rates for people whose circumstances are likely to change.
At present the premium you pay for the security of a short-term fix is quite small. The cheapest two-year discount is from Portman building society at 4.24%. It is also offering the lowest two-year fix at 4.3%.
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If you have a repayment mortgage, Yorkshire building society’s two-year fix at 4.38% will actually work out cheaper over the fixed term than the Portman deal. Yorkshire calculates interest daily, so the amount you are charged reduces each month as you steadily pay off the outstanding capital. Portman, on the other hand, calculates interest annually.
If you are looking to remortgage, Skipton has the best two-year fix. The rate is slightly higher at 4.45% and there is a £445 arrangement fee, but the deal includes free valuation and legal work on remortgages.
If you think interest rates will fall and you are prepared to take a risk, a discounted or tracker rate will be a better option. The monetary policy committee of the Bank of England held base rate at 4.5% last week but many economists think the next move is likely to be down, possibly in May or June.
Discounted deals are linked to the lender’s standard variable rate (SVR). For example, Portman’s 4.24% deal gives a 2.26 point discount from its SVR of 6.5% for two years.
Trackers on the other hand are linked to base rate. Lambeth building society has a tracker that is 0.25 points below base rate for two years, giving a current rate of 4.25%.
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Some brokers, including Savills Private Finance, John Charcol, Chase de Vere and L&C are offering a two-year tracker that is 0.51 points below base rate, giving a current rate of 3.99%. However, there is a £1,499 fee so this is worth considering only if you have a mortgage of about £175,000 or more.
Case Study: Going Short
AARON HAYDEN, 35, and his wife, Paula, 34, have recently remortgaged.
The couple from Chelmsford wanted a fixed-rate, but decided against a 10-year scheme because they did not want to be locked into a deal in case their circumstances changed.
Instead, they opted for a two-year fix from Bank of Scotland after advice from their broker at L&C Mortgages. The rate is 4.49% and they received a free valuation and free legal work.
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Aaron, a graphic designer, said: ‘We need to know exactly what we will be paying each month as budgeting is important.’