Is 10 years too long to tie yourself into a mortgage deal? If the answer is no then it may be worth considering one deal from the Nationwide Society that some pundits have described as extraordinary. They have just launched a 10-year fixed rate that starts at 3.49% with a fee of £999, if you are borrowing up to 70% of the value of your property. Existing customers are entitled to a further 0.1% discount bringing their rate down to 3.39%. They have a suite of 10 year fixed rates, some with fees and some without and they are available for both mortgages and remortgages up to 85% of your property value.
This 10-year deal is a record low rate trumping other offerings from the Yorkshire Building Society who charge 4.54% and the Leeds Building Society who are offering rates as low as 4.19%. Barclays do however match the low of 3.49% but they will only lend up to 60% of the value of your home. A compromise exists with Newcastle who have a relatively high rate at 4.49% but allow to exit the deal after 5 years with no penalties. Nationwide obviously feel there is an appetite for long term fixed rates with almost a quarter of all new loans in September being on 5 year fixed rates. So it is a logical extension for lenders to enter 10-year territory.
Although these rates are very attractive the downsides are that most lenders have large redemption fees if you decide the deal is not right for you after taking it out. Nationwide are no exception with a 7% penalty if you redeem the loan in the first 4 years. The 10 year deals are portable but you need to be aware that if you wish to borrow more when you move house, a request for a significant increase on your initial borrowings may not fit their lending criteria. Alternatively it could be that the top up loan rate is so high that even if you can borrow it the overall deal is uncompetitive, thus forcing you to pay the penalty and move on.
Some people would argue that if this deal is so good the Banks wouldn’t be offering it, and suspect that they possess inside information about rates staying low in the long term. I do not believe this is true and that the banks who could access swap rates over 10 years at 2.8% earlier in the year are merely borrowing at these levels and then putting a mark up onto them. People who believe that rates will not rise and are prepared to take their chance on short term fixed rates to beat Nationwide’s 3.49% rate are currently averaging 2.46% on a 2 year fixed rate deal. These borrowers get flexibility as they can renegotiate every 2 years. However the downside to this approach is that people could stack up fees every time they remortgage, and in some cases they perhaps may not be able to remortgage with mortgage lending tightening as we have recently seen.
So it appears that with the 10 year fixed rate you are typically paying currently a 1.03% insurance premium in return for certain payments over 10 years, and although you are stuck with Nationwide for that period of time they are also stuck with you. Overall I believe this type of mortgage is suitable for the risk adverse and favours people who want certainty of payments for the long term and perhaps have little leeway to manage payments if rates rose significantly.
Kieron Bassett
10th November 2014
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