Price narrowing between two- and 10-year fixed rates shows ‘full 180’ from lenders, brokers say
Pricing between 10-year fixed rates and two-year fixed rates is getting closer, with some 10-year fixed rates now cheaper than two-year fixed rates, with brokers saying they could become more popular with clients .
Nationwide this week, mortgage rates were updated on select term products and various loan-to-value (LTV) ranges. Following the changes, this means borrowers can get a cheaper rate on a 10-year fixed mortgage than on a two-year contract.
As an example, a new borrower taking out a 10-year 85% LTV no-fee mortgage with Nationwide is priced at 4.24%. If they were to complete the equivalent two-year deal, they would see the rate rise to 4.79%.
On a £200,000 mortgage with a 25-year term (principal and interest), Moneyfacts calculations reveal that homeowners who take the 10-year deal would pay £1,082.36 a month, while those who opt for the two-year solution would see monthly mortgage payments at £1,144.84.
Brokers say new pricing dynamic is ‘amazing’, ‘uncharted’ and ‘win/win for lenders’
Generally, two-year fixed mortgage deals tend to be more competitive than three-, five-, or even 10-year counterparts.
Mike Staton, Director of Staton Mortgages, explains, “In the past, two-year fixed rates offered less stability to applicants, which is why lenders charged lower rates for them.
“Now we’re seeing a total of 180 by lenders and the five- and 10-year fixed options getting cheaper.”
In May, the spread between the average rate for a two- and five-year fixed mortgage narrowed to its lowest level since February 2013, but brokers and advisers say this latest move in fixed rates of 10 years is something new.
Joshua Gerstler, Certified Financial Planner and Owner of The Orchard Practice, says, “It’s amazing that you can fix your mortgage for 10 years at a lower rate than you can get for two years.
For Jamie Lennox, director of Dimora Mortgages, this change is “uncharted waters that we are navigating”, while Staton adds that it is the first time in his two-decade career as a mortgage adviser that he has seen 10-year fixed rates cheaper than two-year contracts.
He says, “I think it’s a great business opportunity and I feel like they [lenders] see it as a win/win situation. If interest rates fall over the 10 year period, we will see customers paying more on those fixed rates than will be available in the market.
Customers must consider a balance between stability, cost and flexibility
The economic consensus suggests that the base rate, which impacts mortgage rates, could hit 3% by the end of the year, meaning those with default rates as well as those looking to remortgage or take out a new mortgage will pay more each month.
As such, many will be looking for ways to minimize their monthly outgoings, especially in light of the current cost of living crisis, which could include looking into a 10-year mortgage solution for the first time.
Samantha Bickford, mortgage and equity specialist at Clarity Wealth Management, says: “I can understand why some homeowners would find it tempting, especially with the current market – inflation and rising interest rates – to provide long-term security.
“However, the real estate market is constantly changing and you might be able to lock in a higher interest rate than might be available in the years to come. who can review all the options with you, to review your current and future plans to determine what is the best deal for your situation.Do not be tempted by the idea of a long term fixed rate security as this may to get back to you when your situation changes in the future.
According to Scott Taylor-Barr, Financial Advisor at Carl Summers Financial Services, historically there have been two problems with 10-year fixed rate mortgages.
“The first has always been their cost. Their price was at a level that seemed expensive compared to a five-year fixed rate offer.
“While that has changed recently and 10-year deals now carry less premium (if any), the second issue still stands – lack of flexibility,” he says.
Taylor-Barr warns that many 10-year fixed rates also come with “pretty high” prepayment charges for the entire 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 right one for you in 2032,” he says.
He adds: “If I ask you to tell me what you think life will be like in two years, you will probably have a pretty good idea, even in five years you will have a fair idea of how things will be. go, but over ten years? This is really a guess for many people and seeing as you have to pay a few thousand pounds to escape the mortgage if you get it wrong, it’s not a bet many people are happy to take.
This is echoed by Lennox, who states: “Naturally more and more people will now want to fix for a long term duration. For the average person, 10 years is an extremely long time to be tied down to a mortgage and a lot can change in that period which really needs to be thought through before committing.
He adds that if there is a customer appetite for a 10-year solution, “more and more lenders will follow to gain a slice of that market share.”
Prices show that banks are planning a rate cut
Staton said the move by mortgage lenders to price 10-years more competitively suggests “banks expect rates to come down.”
He explains: “If banks can encourage customers to take 10-year agreements, customers will potentially pay huge prepayment fees to get out of the mortgage if rates go down.
This is backed up by Gerstler who says that for those planning to stay in their current properties for 10 years or more, a 10 year solution is “something you really should consider”. But he adds that 10-year rates like these “imply Nationwide expects rates to be cheaper again in the future, so you might end up paying more on the 10-year, though, if you like security, it’s a good deal”.
Meanwhile, for Rob Peters, director of Simple Fast Mortgage, 10-year fixes are only suitable “for older borrowers who are very confident not to move again”.
He says, “Even then, it’s a roll of the dice, because we just don’t know what twists life is going to take.
“If circumstances change and the loan has to be repaid within the set time frame, borrowers are likely to be slapped with a hefty penalty that will likely massively outweigh any interest rate savings. This can be a great product in the good situation, but definitely a product to be approached with caution.