Should I get a long-term fixed rate mortgage?

The Bank of England held interest rates at 5.25% in February following 14 consecutive rises since December 2021. Here we explain what that means for mortgages and whether you should consider getting a long-term fix.

Lenders have been cutting their mortgage rates over the last couple of months on the expectation that we have come to – or are very nearly – at the end of the Bank of England’s base rate rises.

Homeowners coming to the end of their existing deals are in something of a quandary: to fix, or not to fix: that is the question. And if you do decide to fix now, how long do you commit for? Most lenders offer two, three, five and ten-year deals but you can get some which last even longer.

In this article, we explain:

• Are mortgage rates going down?
• Should I get a 10 year long-term mortgage deal?
• What is good about a long-term fixed rate mortgage?
• What are the disadvantages of a long-term fixed rate mortgage?
• Is a longer term fixed rate mortgage better than a short term one?

Read more: Will mortgage rates go down in 2023?

Understanding fixed-rate deals and mortgage terms

It is important to understand the differences between deals and terms when it comes to mortgages.

What is 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 mortgage of 25 years used to be commonplace for first-time buyers. Due to rising house prices and mortgage rates, many will now opt for a 30-year term or longer.

In fact, a quarter of mortgage holders under 30, who began their loan in 2023, opted for a repayment term of 35 years or more – up from just 10% in January 2020. That’s according to the latest analysis from Experian.

The longer the mortgage term, the more spread out the mortgage repayments will be, making them more affordable on a monthly basis. However you will be making interest repayments for longer which can therefore make the whole loan more expensive.

For example, if you had a £200,000 mortgage at 5% interest over the whole term.

• Over 25 years
  • Monthly repayments = £1,169.18
  • Total mortgage repayment = £350,754
• Over 30 years
  • Monthly repayments = £1,073.64
  • Total mortgage repayment = £386,513

While you will be paying £95.54 less each month, or £1,146.48 a year. Overall you will have to pay back £35,759 more.

Shopping for a mortgage? Try this free mortgage comparison tool.

What is a fixed-rate mortgage deal?

It’s important not to confuse a fixed-rate deal with a mortgage term. In the above example, the interest rate was given at 5% for the length of the mortgage. In reality, the amount you pay will change over the lifespan of your mortgage.

When choosing a mortgage, most people opt for a fixed-rate deal for two, five or even ten years. This means that the amount of interest you pay each month doesn’t change for that length of time.

Many people switch to a new fixed-rate 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 years, it doesn’t stop them from taking out a new fixed-rate deal every couple of years.

Sometimes lenders will offer fixed rates for more than 10 years – but this is rare and there are downsides, which we outline in this article.

Read more: Will UK mortgage rates go down in 2023?

Are mortgage rates going down?

The Bank of England’s aggressive rate hikes since December 2021, from 0.1% to 5.25%, saw mortgage rates soar. But thankfully they have been dropping since the start of August 2023 – albeit slowly.

Mortgage rates hit a peak after the disastrous mini budget in October 2022. A two-year deal shot up to 6.65% before falling back and then surpassing that figure this spring.

Just before the last rate rise from the Bank of England in August, the average two-year fixed rate deal was 6.85%, according to Moneyfacts. The average five-year rate rose to 6.36% while the average SVR was 7.85%.

It was only a couple of years ago when homeowners could get their hands on sub-1% mortgage deals.

When pricing their fixed rate deals, lenders look at a number of economic indicators, including future forecasts around what the Bank of England will do next.

Mortgage rates have been slowly dropping on the expectation that the base rate has peaked, and will soon start to fall.

If you are coming to the end of a fixed deal, the landscape will look very different now to when you initially took out your deal. You might be facing hundreds of pounds more in monthly repayments.

Example

e.g. based on if you took out a two-year fix on a £250,000 mortgage in:

• September 2023: Average rate at 6.56% = monthly repayments £1,697
• December 2023: Average rate at 2.34% = monthly repayments £1,102
  • Extra per month = £595
  • Extra over the two years = £14,280

e.g. based on if you took out a five-year fix on a £250,000 mortgage in:

• September 2023: Average rate at 6.06% = monthly repayments £1,620
• December 2023: Average rate at 2.64% = monthly repayments £1,139
  • Extra per month = £481
  • Extra over the five years = £28,860

These are scary figures.

Yet, with mortgage rates dropping, you might be asking yourself whether you should move on to your lender’s more expensive variable rate for a short time or fix in the expectation that there could be a much cheaper deal available in a few months.

Which leaves the question: to fix or not to fix?

Should I get a ten-year mortgage deal?

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 or ten years’ time?

Interest rates are particularly high at the moment because the Bank of England is trying to get inflation down in the UK.

Mortgage rates have shot up as a result, however, there may be light at the end of the tunnel. The Bank of England expects inflation to hit its target rate of 2% in 2024 and 2026. It is currently 4%.

Some experts think that we may have already reached peak rates after the central bank held rates at their last MPC meeting in February.

The cost of living crisis and rising mortgage rates have put pressure on home owners, and house prices have started to fall. It is reasonable to expect that in this environment, mortgage rates would continue to fall. But the amount by which they might fall is impossible to predict.

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 took out a long term fix and rates were to fall, you would be locked in at the high rate until the end of the mortgage term. You would also not be able to take advantage of the cheaper interest rates available as you built up more equity in your home.

When will the base rate rall?

The Bank’s own forecast from August, does not foresee the rate starting to drop until mid-2024 and that it could still raise it to 6% depending on changing market conditions. The rate is then expected to remain above 4% until at least the end of 2026.

While rates are expected to remain at least four-times above the typical 2010s for the next three years, 4% would still indicate a 1.25% fall from the current rate.

While it is not guaranteed that rates will continue to fall over the next ten years (were you to take out a decade-long fix), it is worth bearing in mind where the experts believe rates are heading when making your decision.

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 (though bear in mind you can get mortgage advice for free).

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.   

Read more: ‘Do I need a solicitor to remortgage?‘

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.

Read more: Different types of mortgages, which one is right for you?