Many UK banks and building societies offer 10 year fixed rate mortgages, but is it a good idea to fix your rate for a whole decade?
Fixing the rate on your mortgage for 10 years offers peace of mind, and allows you to budget well into the future. The payoff is that you’ll lose out if interest rates go down – leaving you stuck on a relatively expensive rate.
However, with the Bank of England base rate on which many mortgage rates are calculated at a record low of 0.1%, 2020 could be a very good year to switch to a fixed rate mortgage.
The financial impact of the Covid-19 pandemic has forced interest rates to record lows in 2020. The base rate has plunged from 0.75% at the beginning of the year to just 0.1% at the time of writing (September 2020). Mortgage lenders have also reduced their rates, giving rise to some of the cheapest fixed rate deals ever.
With the UK now in recession, it’s unlikely interest rates will start going up again any time soon. And there really is very little room for them to fall further at this point. So a fixed rate mortgage that lets you lock into today’s low rates for 2, 5, or 10 years may well seem an attractive option.
However, Covid-19 is a good example of how unexpected events can completely change the interest rate environment. While we can be fairly confident that interest rates will go up again at some point, it’s impossible to predict when and by how much – so you should still think carefully before fixing your mortgage rate. Find out more with our guide on when to fix your mortgage rate.
The most obvious advantage is that your mortgage costs are fixed for the long term: your rate and your monthly repayments will stay the same for 10 years.
This means you know your repayments will not become unaffordable due to interest rate hikes. It also means you can accurately predict your living expenses for the next 10 years, making it easier to manage your finances.
If interest rates rise during the 10 year term of your mortgage, you will probably also save money by not being on a variable rate. You may even find yourself on one of the cheapest mortgage rates available. By signing up to a long-term deal, you can also avoid having pay to arrange a new deal in a few years’ time.
You are stuck with this rate for 10 years; if you want to switch within that time, you will generally have to pay exit fees to do so. These can be hundreds, or even thousands, of pounds. So interest rates will have to become a lot cheaper to make it worth paying these charges to switch to another mortgage deal.
You’re therefore likely to end up paying over the odds for several years if rates go down during the 10 year term of your deal.
You can save thousands of pounds a year by switching from your lender’s Standard Variable Rate to the best 10 year fixed rate mortgage.
But when working out how much you can save by switching to a 10 year fixed rate mortgage, it’s vital to factor in the fees and charges involved – as well as the interest rate.
Arrangement fee – Typically around £1,000, but can be anything from £0-£2,000.
Booking fee - Usually £99-£300.
Telegraphic transfer fee - Typically £25-£50.
Valuation fee - Usually £150-£1,500 (depending on your property value).
Mortgage account fee- Typically £100-300.
Mortgage broker fee - This is normally around £500, but can also be a percentage of the value of your mortgage (paid as a commission).
Exit/Closure fee - Usually £75-£300.
Early repayment charge - Typically between 1–5% of the value of your remaining loan, these charges – known as ERCs – only usually apply if you want to switch during your mortgage term (i.e. 10 years).
If you still have a substantial amount to repay on your mortgage, remortgaging to a 10 year mortgage could be a very wise move – especially if and when mortgage rates start going up again. However, if you only have a few years and a small amount left to repay on your mortgage, it may not be worth remortgaging once you take into account the fees and hassle involved.
Find out more about the costs of remortgaging (or moving home) with our guide to home buying costs.