The Bank of England has raised UK interest rates for the 12th consecutive time in a row making it harder than ever to decide whether or not to get a long-term fixed rate mortgage. We weigh up the pros and cons.
If you’re considering a fixed-rate mortgage then you need to decide how long you want to commit for. Most lenders offer two, three, five and ten-year deals but you can get some which last longer.
Mortgage rates soared in 2022 and haven’t fallen that much since. This means locking into a long fixed deal now could leave you paying above the odds later. However, there are upsides to a longer commitment.
Understanding fixed-rate deals and mortgage terms
A long-term mortgage of 25 years used to be commonplace for first-time buyers. But due to rising house prices, many will now opt for a 30-year mortgage term or longer. This is because doing so can make the mortgage repayments more affordable.
The maximum is a 40-year mortgage term, which many banks currently offer.
It’s important not to confuse a fixed-rate deal with a mortgage term:
- The mortgage term is the lifespan of the loan. It gives you an indication of how long it will take to pay off the entire mortgage.
- A fixed-rate deal is the window of time during the mortgage term when you can lock in an interest rate.
Many people switch to a new fixed deal when their current one ends. This is to avoid rolling onto their lender’s expensive default tariff known as a standard variable rate.
While many homeowners may have a mortgage term of 30 or 35 years, it doesn’t stop them from taking out a new fixed-rate deal every few years.
However, it’s now possible to take out a mortgage with the rate fixed for the entire duration of the term.
An increasing number of lenders are starting to let borrowers lock in an interest rate for up to 40 years.
However, there are downsides, which we outline in this article.
Read more: Will UK mortgage rates go down in 2023?
Should I get a 5-year or 10-year mortgage deal?
Following all the increases in the Bank of England’s base interest rate since December 2021, mortgage rates have been going up.
On 11 May the Bank of England raised the base interest rate to 4.5%.
Rates peaked in October 2022 following the mini-budget when the average two-year fixed mortgage deal had a rate of 6.55%. Mortgage rates have been falling since then.
These heightened rates are a stark contrast to the ones on offer a year prior. Bargain hunters could previously sniff out sub-1% mortgage deals.
Rates have dipped slightly from October’s highs – our guide outlines the latest rates.
Currently, an average ten-year fixed rate deal can be found for around 5.5%. And the average rates on a five-year fix are about 5.1%.
Prior to this, long-term deals tended to be more expensive than the shorter ones. That’s because rates were historically low and you were paying for the privilege of locking in at that time.
But now, the situation has reversed. Since rates shot up lenders will give you a lower rate if you fix your mortgage for longer. That’s because if rates fall and you’ve locked in for long, you will be stuck paying over the odds.
If you are trying to decide on the length of your mortgage deal then ask yourself the following:
Do you think rates will be higher or lower than they are currently in two, five and ten years’ time?
It’s important to remember there is no way of knowing what will happen to mortgage rates in the future. However, it’s worth bearing in mind interest rates are particularly high at the moment. The Bank of England is keeping them high to try and curb inflation.
However, there may be light at the end of the tunnel. The Bank of England (BoE) predicts inflation will fall halfway through 2023. When this happens the BoE is expected to lower the base interest rate. It’s reasonable to expect this would cause mortgage rates to fall in turn.
But the amount by which they might fall is impossible to predict.
It’s also important to remember anything can happen to the economy in the coming years. And fixing your mortgage deal for a long time can have its upsides.
What is good about a long-term fixed-deal mortgage?
1. Predictable repayments
The big plus point about a longer-term fixed deal is that your monthly repayments are predictable for the length of the deal.
It means you don’t have to worry about what’s happening in the wider mortgage market. It also means you are effectively protecting yourself against interest rate rises.
For instance, if you secure a five-year deal and interest rates creep up in that time, when you switch to a new deal you may have to pay a higher rate than the one you are currently on.
But the opposite is true too. If interest rates go down before your deal has expired your mortgage becomes more expensive compared to newer ones.
2. It saves time
People on shorter-term deals will want to shop around every few years for a new deal, which can be time-consuming.
Each time you switch you would probably spend time researching the mortgage market and speaking to a broker to choose a new deal.
Applying for a new mortgage can be time-consuming as you will have to provide lots of paperwork, such as proof of earnings and bank statements.
One alternative is to speak to your existing lender to find out about their deals. Switching to a new deal with your existing lender is known as a product transfer, and typically takes less time and involves fewer fees.
3. It can save (some) money
Locking in a long-term mortgage deal could save you money on lender fees.
This is because most deals come with product charges, typically around £1,000. If you were to switch ten times over 35 years, that’s an extra £10,000 in fees that you might have to pay on top of your mortgage.
If you are paying a mortgage broker each time you switch to a new deal, the fees can also mount up to thousands of pounds over the lifetime of your loan.
Opting for a long-term fixed-rate mortgage means you no longer have to worry about these extra costs.
Keep in mind that a product transfer with your existing lender may be another way to help you save on fees.
Looking for a mortgage? Use our free mortgage comparison tool.
What are the disadvantages of a long term fixed rate mortgage?
1. You could end up paying over the odds for years
If you lock into a long-term mortgage deal of now while rates are high, if they come back down, you would be stuck paying more than the market average until your deal ends.
If you only fix your mortgage for two years and rates fall back down in that time, when your deal ends you can come onto a new deal charging a lower interest rate.
The Bank of England predicts that interest rates will fall in the coming years – if it’s correct, anybody locking into a lengthy deal now may regret their decision.
However, it’s impossible to know for sure what the future holds for mortgage rates.
2. Restrictions
Some banks impose age limits on their long-term mortgages to prevent running the risk of people paying off loans in retirement.
It’s worth noting that many banks have a maximum age limit of around 70 for borrowers.
For example, Santander will only offer a 40-year term to people under the age of 35. This is to avoid the risk of them paying off their mortgage in their mid seventies.
3. Exit fees
Bear in mind that some long-term fixed-rate mortgages come with hefty exit penalties if you decide you want to switch before the term has ended.
While lenders like Habito don’t charge exit fees, make sure you understand any costs you could end up paying if you decide to exit your deal.
Is a longer fixed-rate mortgage better than a short-term one?
Longer-term home loans are a double-edged sword. They reduce monthly repayments by spreading the loan over more instalments, but they also increase the amount of interest you pay over the full term.
So, for example, if you are a first-time buyer with a £200,000 mortgage paying an interest rate of 5.5%:
- Your monthly payments would be £1,056 over 25 years. However, your total interest payments would amount to £116,702 over 25 years.
- If you took out the same loan with the same interest rate but over 40 years, you would pay £836 each month. But your interest payments would be £201,221 over 40 years, making the longer term loan nearly twice as expensive.
Long term fixed rate mortgages are usually only available to people with large deposits, which means they haven’t typically been useful for first-time buyers who can often only stretch to a 10% deposit.
If you were to lock into a high rate and remain on that mortgage for the entire term, you would miss out on cheaper interest rates that would be available to you as you built up more equity in your home.
