Benefits and Drawbacks of 10 Year Mortgages

Benefits and Drawbacks of 10 Year Mortgages

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With UK interest rates now on what is looking like a steady but lengthy upward trend, many homeowners and first time buyers are wondering whether they might be better off looking at a longer-term fixed rate deal. For instance, quite a few mainstream lenders now offer 10 year fixed rate mortgages, with both Halifax and Lloyds being the most recent lenders to enter the space. But what are the potential pros and cons of taking on a 10 year fixed rate mortgage?

While we would always suggest that you chat with a fees free mortgage advisor* before proceeding to help you find the best available rates, let’s look at the potential benefits and drawbacks of long-term fixed rate deals, to help you decide if this is the right choice for you.

Benefits of a Long-term Fixed Rate Mortgage

There are many pros to long-term mortgages such as 10 year fixed rate deals, especially in times of economic uncertainty.

Peace of mind over payments – The first benefit of a ten year fixed rate deal is that it will give you peace of mind in knowing that your monthly mortgage payment won’t change at all for the next 10 years. Just knowing this can allow you to make long-term plans, without having the worry that your mortgage payment might see a hefty hike in just couple of years time.

House price fluctuations are less of a risk – Bar a period of turbulence in the housing market during and after the financial crisis of 2008, we’ve generally been used to seeing house prices rise in this country for a good couple of decades now. History teaches us, though, that house prices can fall sharply and this can cause big problems for those on short-term mortgage deals. Why?

If house prices have fallen when people come to remortgage, homeowners may find that they have very little equity in their homes or worse yet, they may even be in negative equity. This could mean that they get stuck with a high interest rate on their existing mortgage or – if they are able to remortgage – they may not get a very good deal with a new lender due to the high LTV. With a 10 year fixed rate mortgage, you may still have this problem if there is a long-term drop in house prices or if you’re unfortunate enough for your 10 year deal to end during one of these short-term dips, but at least you won’t have to worry about that possibility for a much longer period of time.

Only one affordability and credit check in 10 years – Sometimes things can happen in life that are beyond our control and this could lead to a drastic change in circumstance. These life events may even impact on your credit file. What if you were to lose your job, for example? You many have enough savings or income coming in to get by and still pay your mortgage, but what if you had to remortgage because you are on a short-term fixed rate deal of just a couple of years? Would you still pass a lenders affordability criteria or might you fail a credit check? These things can certainly happen and could again mean you end up stuck on your current lender’s SVR. With a 10 year mortgage, you won’t have to worry about these things nearly as often.

Protection against rising interest rates – Now we come to the most obvious benefit of a 10 year fixed rate mortgage, and that is that you will be protected against future interest rate rises for a much longer period. Many central banks around the world – including the Bank of England – have indicated the need for rate rises over the coming years. The process of bringing rates back toward more normal levels has already begun and is likely to continue at a steady pace in the coming years, as long as the economy remains robust enough to withstand the rises. Locking in to a long-term fixed rate deal would effectively shield you from these rises.

Drawbacks of a Long-term Fixed Rate Deal

Now that we’ve discussed the potential benefits or pros of a 10 year fixed-rate mortgage deal, let’s now balance the argument out by considering some of the cons and how these might personally affect you.

Early repayments charges – One of the biggest drawbacks of any fixed rate mortgage deal are the early repayment charges. This is especially true when we consider fixed rates of 5 years or longer. As we’ve already discussed in this post regarding a job loss, life can sometimes change quickly and unexpectedly. While this might not be so bad if you can still afford your mortgage, if you can’t then the early repayment charges may be a big pill to swallow if you are forced to sell.

Also, what if life changes in other ways? Perhaps your family grows at a faster rate than you expected or maybe you didn’t plan on having children at all. If you find yourself in a position where you really need to move house before the end of your long-term fixed rate deal, then this has the potential to cause headaches. Sure, you may be able to port your mortgage, but this can often lead to affordability and credit checks once again and with criteria differing so much from lender to lender, it may not be a simple process.

What if interest rates don’t go up? – One of the main reasons people are looking at long-term fixed rate mortgage deals right now is because they are expecting interest rates to rise over the coming years. But what if they don’t? It certainly looks as though they will at the time of writing, but there are many things affecting the UK economy right now that could halt that rise if things don’t go to plan. Brexit being the obvious one. There’s a possibility that rates could even fall again. If this were to happen then you could well end up paying a lot more on your mortgage than you really needed to.    

Long-term fixed mortgage rates are higher – The other obvious drawback of long-term mortgage deals is that the rate you pay is often higher than you would pay for a short-term deal. At the time of writing, for example, interest rates on 10 year mortgages are around 1% more than they are on similar 2 year deals. So you will pay more in interest and on your monthly payment from the start.

If You’re Unsure, Get Advice

Here we’ve examined some of the pros and cons of long-term fixed rate mortgage deals, specifically 10 year deals. We hope that some of the arguments mentioned have helped you to decide whether a 10 year fixed rate mortgage is the right option for you, or whether you’d be better off opting for a 2, 3 or 5 year deal. If you’re still unsure then we would suggest you have a chat with a whole of market, fees free online broker like habito*, as they will be able to better look at your personal circumstances and advise you on the right path to take.

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