My two-year fixed rate mortgage comes to an end in October. Having always gone for two-year fixes in the past, my last experience has put me off.
The timing was terrible and I have been paying 5.62 per cent for the last two years, because I fixed during the 2023 rate spike.
I don’t envisage myself moving home, so I’m wondering whether I should take 10-year fixed rate to avoid any more uncertainty.
My outstanding mortgage is roughly £220,000 and my home is worth about £450,000 so I should have access to the lowest possible rates.
Do you think a 10-year fix would be foolish? What options would I have if my circumstances changed and I needed to move or remortgage?
Mortgage help: Our weekly Navigate the Mortgage Maze column sees broker David Hollingworth answering your questions
David Hollingworth replies: First and foremost, it’s the right time to be thinking ahead and assessing the options available at the end of your current deal.
This gives you enough time to consider choices from your existing lender, as well as seeing what other banks and building societies have to offer.
You have time to identify the best overall deal, prepare for a smooth switch and avoid drifting onto a higher standard variable rate.
It’s tough to time the mortgage market
The current deal may feel like it’s been a slog, but mortgages are often heavily dependent on timing. The end of a fixed deal might arrive at a time when rates have moved against you, as you have found.
Prior to this deal, you may have found that shorter term fixes worked for you in a benign, low rate environment. While two-year and five-year fixes now have very similar rates, two-year fixes were also once a cheaper option.
But in the mortgage ups and downs of the past few years, those with five-year fixes taken at the low point in 2020 or 2021 have been protected.
Some may still have a rate of 2 per cent or less, compared to a 5 per cent average.
It’s impossible to know exactly what will happen to interest rates in the future, so it makes sense to remain focused on what will suit you better and why, rather than kick yourself with the power of hindsight.
Mortgage rates are falling
Mortgage rates have eased back so the good news is that you will have better rates on offer than your current deal. However, it’s a good idea to consider all the options, rather than head straight for the lowest rate.
Most borrowers are continuing to fix their rate, as these rates are still currently lower than the variable rate options, although that could shift if the base rate continues to slide.
Two-year rates have now dropped a little below five-year deals as markets anticipate that base rate could potentially drop further this year and into next.
There’s not a big margin between them though, as current forecasting suggests that base rate will then bottom out and stay there.
That may or may not turn out to be the case and forecasting alters quickly depending on the emerging data.
The Bank of England cut base rate at its August meeting, but it was a 5-4 split decision with some of the committee preferring a hold.
Even since then there’s speculation that the weaker labour market stats will keep rate cuts on the agenda.
Second guessing what may happen is difficult to say the least. Few expected such a sharp spike in interest rates before it took hold but that’s precisely why it’s a good idea to think about whether longer-term security appeals.
Longer-term security
There’s been a growing range of longer-term fixed rates on offer. Only a small proportion of borrowers opt for these, which has typically been due to higher rates coupled with a lack of flexibility.
Most fixed deals will carry early repayment charges throughout the fixed-rate term, which can be off-putting if there could be a need to review the mortgage.
However, there are more flexible options emerging.
April Mortgages is focused on longer fixed rates of five to 15-years. These do carry an ERC, but that is waived if the mortgage is paid off due to a house move or even from cash savings.
The penalty would be incurred if switching to a different lender, but its approach gives more flexibility to deal with life events.
Lender Kensington works in a similar way, and Perenna offers fixes for up to 40 years but only apply ERCs for the first five years.
Many high street lenders also offer ten-year mortgages, but without some of these flexible terms.
What are the rates on 10-year mortgages?
These open up the amount of flexibility of longer-term deals, but you will have to take a view on what you’re prepared to pay in the near term for that additional stability.
Two- and five-year rates can be found well below the 4 per cent mark whereas the lowest 10 year rates will start around 4.5 per cent.
Deals with more ERC flexibility, such as April’s ten year rates, can start below 5.5 per cent.
We can’t know now what will be cheapest overall, but long-term fixed rates could prove valuable if rates were to spike again, potentially being cheaper but also giving you greater budgeting confidence.
It also avoids potential costs and fees every couple of years.
You and many others have been affected by the sudden and rapid rise in interest rates.
Think about how much you’d prefer to avoid those bumps in the road in future.
There are fixed rates that fit almost every term requirement, so take advice to find the right balance for your needs.
