10yr Fix? really new to the mortage game!

Jacka87

I got this website a while ago from another poster and tend to use it as its impartial n finds good rates. fsa.gov.uk /tables

Problem is it now only has 9 different lenders that offer 10 yr fixes with my requirements and the RBS who where once on the best rate now do not come up at all! This was my main concern, offers being pulled away!!!

PS Abbey are now the best rate as the previous poster noted! Well done

samizdat

The problem with long-term fixes is that they always come with early redemption penalties. You may feel that you will hold the mortgage for longer than 10 years but much can happen in that time, e.g. divorce (or, if you are unmarried, marriage followed by divorce); migration away from the UK; increased income leading to desire for more expensive house and the lender then not being competitive on the required element of increased borrowing; desire to move to another equally-priced property at a time when you do not meet the lender's underwriting criteria, undermining the idea that your mortgage had "portability".

Another problem is that the market in long-term fixed rate mortgages is not as competitive as for variable-rate or short-term fixed mortgages. This means that the margin charged by the lender above its cost of funds will systematically be higher for longer-term fixes than for short-term fixes or variable rate mortgages. Moreover, a lender's cost of funds reflects to a significant degree the overall market view of the likely path of future interest rates. Therefore, unless you believe you know the future path of interest rates better than other market participants, you are likely to be paying a premium (i.e. more) for taking a fixed rate mortgage. This exacerbates a feature of credit markets, which is that borrowers tend to value certainty of their repayments more than lenders value certainty of their interest income.

Another problem is the credit crunch. Lending margins are currently very high across all mortgage products. If you fix now for ten years, you are effectively agreeing to pay these unusually high margins for that period of time, whereas it is likely that these tight lending conditions will ease at least to some degree in the next few years.

On the other hand, long-term market interest rates are unusually low at the moment, probably reflecting a premium paid by investors for the relative safety of government bonds compared with other asset classes and also unconventional monetary policies being implemented by the Bank of England (so-called Quantitative Easing). These conditions offset the effects mentioned previously.

Also, the unusually low Base Rate (0.5%) and the tight credit conditions have led to a change in the market for variable rate mortgages, which are much more expensive today relative to Base Rate than for, well, decades. It is pretty obvious that when market conditions normalise, Base Rate will go up quite sharply, lending margins will reduce, and those who have taken out a variable rate mortgage at these levels will need to remortgage.

I believe you should therefore consider taking a short-term fix for a few years, preferably one with low transaction costs (arrangement fee, valuation etc.) and a decent follow-on rate (in case your financial position is worse when the fix comes to an end). Alternatively, take a variable rate tracker, save some money now, and recognise you will probably wish to remortgage within the next 18 months to 2 years. (I admit I don't have a crystal ball, this part is supposition.)

Jacka87

Thanks for the input samizdat, however I have some concerns.

You mention big life changes, but getting married having a child etc would not make me want to move home at this point and if so the mortgage is supposed to be portable. I like the area where I live and dont see me moving for a long time. My job is very secure but I have stong back up options aswell, I am very fortunate that way.

You said that I am needing to beat the market cos of the overpriced rates. Well the rates are overpriced, base rate @0.5% and fixed rate at 5% but the new variable rates are all a couple of % above base rate and since I believe rates will rise into double figures that would cost me a lot, enough to put me in major trouble! The thing is you are talking about switching at the point of maximum gain, just as the rates rise, I am wanting to do that though I need to make sure if I dont get it right I get it early rather than late. The problem is though that I have noticed banks are already pulling away the good fixed deals, and that makes me think that its you who is trying to beat the market. When rates rise it suits the banks to keep everybody on the high variable & tracker rates so they are going to make it difficult to switch to a cheap fixed rate then, either by putting the fixed rates up or by just pulling all the cheap optians, already though it seems the cheap ones are disapearing and I wonder y???

The crystal ball for the right time to jump would be nice and I am asking when people might predict that be?

samizdat

Well, you know your own circumstances better than anyone. However, to re-emphasise, portability is at the lender's discretion. Look at how lenders have reacted to the credit crunch and appreciate that the manner in which lenders exercise discretion can change very dramatically, especially over a ten-year period.

As for interest rates, I think you should consider that Base Rate is the rate for overnight lending, whereas there are other rates quoted for longer periods of time. See for example the governement bond yield curve: www.bloomberg.com/markets/rates/uk.html

Long-term lending rates available in the market tend to be priced relative to government bond yields. As I look now, the 10-year yield is 3.72%, which would be relevant for an interest-only mortgage. For a repayment mortgage, the seven or eight year yield is a more appropriate benchmark (government bonds are not repaid until their maturity date, whereas repayment mortgages have a reducing outstanding balance). These are showing as 2.93% and 3.12% respectively at the time of writing.

So, you could say that a hypothetical 5% 10-year repayment mortgage would currently be priced at a premium of about two percentage points over risk-free rates (i.e. government bond rates). Before the credit crunch, the premium was lower, maybe one or one-and-a-half percentage points. In the case of two-year fixes, government bonds are yielding about 1.2% whereas you can obtain mortgage rates of about 3% in the market, a premium of 1.8 percentage points. Pre-crunch, the premium was actually negative because Banks sold these mortgages as a loss-leader.

What I would expect is that when credit conditions relax, the unusually high premium paid for short-term fixes will reduce substantially, whereas the premium for longer-term fixes won't reduce as much. You could say that that makes longer-term fixes better value relative to pre-crunch standards than short-term fixes at the moment. Alternatively, you could say that you would be better off taking a short-term fix and rolling it over into a cheaper (relative to bond yields) short-term fix when conditions are better.

If you really believe rates are heading into double-figures, just take the long-term fix and sleep at night! However, consider that if rates do go that high, it is likely that the cause will be high inflation, which should mean that your income rises also and the real burden of your mortgage debt will be inflated away - provided you can meet the payments.

Jacka87

Firstly I would like to say that you put very good points across.

I agree with your point about government bonds etc, however at the end of the day interest rates is what we deal in cos its what the mortgages are leant to us at, not government bond rates.

One of the reasons for the interest rate rise is inflation but an amount of it will come from the fac the banks need to earn a profit to pay off there own debts.

The other issue I have is that you reckon you could get a negative premium on loans pre crunch because the banks where using mortgages as loss leaders, if thats the case how come everybody with trackers etc just now borrowed when the rate was around 5%? Surely they could have borrowing a way down towards government bond rates of 3% etc?

Though I am tending to agree with your final point of being able to sleep at night I think that might sway my decision in the end.

samizdat

Jacka87 wrote: »

One of the reasons for the interest rate rise is inflation but an amount of it will come from the fac the banks need to earn a profit to pay off there own debts.

The credit crunch has reduced competitive pressures on those Banks that are still able to lend money. There is little reason to suppose that the credit crunch will worsen from here, therefore the profit-making that you worry about is actually at its peak at the moment.

Jacka87 wrote: »

The other issue I have is that you reckon you could get a negative premium on loans pre crunch because the banks where using mortgages as loss leaders, if thats the case how come everybody with trackers etc just now borrowed when the rate was around 5%? Surely they could have borrowing a way down towards government bond rates of 3% etc?

At the time when Base Rate was at 5%, 2-year government bond yields were much higher than they are now and so were 2-year fixed rate mortgages. You could go back through the mortgage forums and find out what rates people were being offered back then (i.e. around August/September 2008). Don't forget also that the loss-leader rates I was referring to really came to an end towards the end of 2007, when the credit crunch began to bite. You could check back to the summer of 2007 and see what the story was on mortgage rates.

I myself was monitoring variable rate offset mortgages between 2006 and 2008. Looking at my notes, I see that in October 2007, Darlington Building Society was offering an offset tracker at Base Rate minus 11 basis points (0.11 percentage points) for 5 years, followed by Base Rate plus 50 basis points for the remaining term of the mortgage. There was a 1% early redemption fee during the first 5 years. Unfortunately, I was on a fixed rate with early redemption penalties at that time and didn't want to incur switching costs. This is illustrative of the kind of loss-leader deals that Banks entered into before the credit crunch (or just after it had started in the case of Darlington).

gil13

Some good well argued points on this thread.I think a 10 year fix anything between 4.5-5.5% is a pretty good deal over that time frame. Not suitable for everyone for sure but I think there is a lot to be said for certainty. We also took a 10 year fixed offset end of last year and are pretty pleased with that, I think an offset arrangement might afford the extra flexibility that compensates for some of the downsides to a longer fix.

jenniferfluff29

Hi There

I took out a 5yr fix in Jun 04 at 5.89%.

I upsized in Oct 04 with the additional lending on a 5-year fix of 5.79%.

I like the stability of long term fixes.

The house I am moving to will be my house for a very long time. I am taking a 10year fix with Britannia at 4.89%. I consider this to be good considering what I had to take on the previous 2 occasions that I fixed. Only downside is the hefty redemption fees.

I don't like risk, therefore fixes are great. If you don't think you will move again, stable relationship, etc then why not.

Most mortgages are portable anyway so you can transfer it to your new home if necessary.

Fluff

foreversummer

An excellent and refreshing thread. Thank you Samizdat for putting you views across so well - a lot of interesting points in there that often get overlooked.

Foreversummer

samizdat

foreversummer wrote: »

An excellent and refreshing thread. Thank you Samizdat for putting you views across so well - a lot of interesting points in there that often get overlooked.

Foreversummer

Thank you!

By the way, I am not saying long-term fixes are necessarily always a bad idea. Nominal payment certainty is definitely valuable; but that is not quite the same thing as being lower risk than variable rate mortgages. As a matter of fact, my own view is that the really bad scenario for long-term fixed rate borrowers, namely prolonged deflation, is very unlikely to occur in the forseeable future. The Government and the Bank of England have made it pretty clear that they will do whatever it takes to ensure that that never happens, including printing money.

It is definitely quite possible that the outcome of current policy will be a period of high inflation and a sustained rise in interest rates. I am not going to say people are unwise to hedge against that, as long as they understand the costs and risks of doing so (apart from deflation, the risks are mostly breakage costs, i.e. early redemption penalties).

I myself need the flexibility to redeem early and am just trying to make hay while the sun shines (I have an offset tracker now).