MSE News: Considering a 10-year mortgage fix? Here are the pros and cons

Crystal Ball time

My wife and I took out a 10 year fix with the Co-op back in early 2006.

It did the job we wanted it to - fixed our payments, with certainty about what our monthly repayment would be. We were protected from rate rises in the first few years - but then obviously rates crashed.

We could look back and say we'd have been on a lower rate for 7 of those 10 years of we hadn't fixed, but we wanted certainty, and we got it. We massively overpaid each month from day 1 which made a huge difference - we actually paid our whole mortgage off within the 10 year fix.

We could have been several thousand pounds better off if we hadn't fixed, but that isn't the point. We got the certainty we wanted. We protected ourselves from an unpredictable interest rate, and still both ended up with a house we had fully paid for before we each reached 40.

No one has a crystal ball. We wanted to reduce the risk of unpredictable increases to our outgoings. That's what a long fix can do.

A ten year fix may end up being a bargain that saves thousands, or something that ends up costing well over the odds - but that's only in comparison with what others pay. A fix is about removing that uncertainty. It's not about money saving. It might or might not end up being money saving.

look at a couple of statements

Avoid extra mortgage fees. Regularly switching deals means fees can add up - if you take out five consecutive two-year deals over a 10-year period, you'll be paying any arrangement fees five times over, potentially setting you back £8,500 if you pay the £1,700 fee charged for the current lowest-rate two-year fix (up to 60% LTV). Meanwhile, the current lowest-rate 10-year fix (up to 60% LTV) has set-up fees of £1,034, which of course you'd only pay once over the 10 years - an instant £7,466 saving on fees. However, an increasing number of mortgages have no fees at all - see our Four in 10 mortgages are now fee-free news story for full info.

You would need a big mortgage to be paying the fees 5 times on a series of 2 year deals.
For that £1,700 the break even over 2 years for that deal(1.43%) over the no fee(1.89%) with full term 25y was around £193,000.
(rates were in the previous article before the rate rise)

if that had been the 5th fix (17years left)you would have needed a mortgage of £197,000 that would have started out 8 years earlier at over £270,000

If you had mortgage debt of £120,000 on a £200,000 property, and took out the top two-year fix on the market (1.49% from Chelsea Building Society, with set-up fees of £1,900),

On a £120k mortgage over 25y any no fee two year fix below 2.32% will save money over paying £1,900 in fees on 1.49%

Initial costs of 2-year vs 10-year fixes:

If you had mortgage debt of £120,000 on a £200,000 property, and took out the top two-year fix on the market (1.49% from Chelsea Building Society, with set-up fees of £1,900), your monthly repayment would be £487, amounting to a total cost of £11,687 over the two years of the fix. Meanwhile if you opted for the top 10-year fix on the market for the same mortgage debt, your monthly repayments would £542, while your total payments over the first two years of the fix would be £13,018. However, while two-year fixes are cheaper initially, if you continued to take out two-year fixes over 10 years the further set-up fees and potential rises in interest rates could offset this early saving.

once again totally ignoring the remaining debt just looking at the payment to get the saving of £1,331 over the first 2 years

I think we have these 2 deals 25y term with the fees added
£120k 1.49% £1,900 £486.95pm 2 year fix
£120k 2.49% £1,034 £542.37pm 10y fix.

if we make the payment the same(£542.37) then after 2 years you are left with

£112,380.53
£113,875.28

The actual saving would be £1,495(10% more) but then on £120k you would be looking at no/low fee for a 2y fix they are usually better.

using the best buy link a better 2 year deals would be TSB 1.55% with £495 fee

£120k 1.49% £1,900 £486.95pm 2 year fix
£120k 1.55% £0,495 £484.74pm 2 year fix
£120k 2.49% £1,034 £542.37pm 10y fix.

after 2 years

£112,380.53
£111,074.29
£113,875.28

Now the 2y is £2,800 ahead at the 2 year point.

To put that into context with another 2 year deal
to still be ahead at year 4 against the 10y year fix any 2y no fee rate below 3.81% will work.

if the 2y/no fee rates went up to 2.49% for the second one at Y4 you would owe £103,407 against the 10y fix where you would owe £106,351

Still nearly £3k ahead at Y4 and a 3rd 2y fix rate could be as high 3.99% to still be ahead at Y6

Stuart_W wrote: »

A ten year fix may end up being a bargain that saves thousands, or something that ends up costing well over the odds - but that's only in comparison with what others pay. A fix is about removing that uncertainty. It's not about money saving. It might or might not end up being money saving.

This is exactly what I came on this thread to post.

I'm going to be buying my first - and hopefully only - house in the next couple of years and I've been trying to learn as much about the process as possible.

I'm reasonably confident I'll be going for the longest fix available to me - not because I think it's cheapest, but because I greatly value knowing exactly what my regular outgoings will be and that I can afford my home.

Stuart_W wrote: »

My wife and I took out a 10 year fix with the Co-op back in early 2006.

It did the job we wanted it to - fixed our payments, with certainty about what our monthly repayment would be. We were protected from rate rises in the first few years - but then obviously rates crashed.

We could look back and say we'd have been on a lower rate for 7 of those 10 years of we hadn't fixed, but we wanted certainty, and we got it. We massively overpaid each month from day 1 which made a huge difference - we actually paid our whole mortgage off within the 10 year fix.

We could have been several thousand pounds better off if we hadn't fixed, but that isn't the point. We got the certainty we wanted. We protected ourselves from an unpredictable interest rate, and still both ended up with a house we had fully paid for before we each reached 40.

No one has a crystal ball. We wanted to reduce the risk of unpredictable increases to our outgoings. That's what a long fix can do.

A ten year fix may end up being a bargain that saves thousands, or something that ends up costing well over the odds - but that's only in comparison with what others pay. A fix is about removing that uncertainty. It's not about money saving. It might or might not end up being money saving.

If you had the finances in place to "massively overpay each month from day 1" then I'm sorry, but that was just a really bad financial decision.
That you paid off your mortgage during the 10 years is nice, but irrelevant; you'd have paid it off years earlier if you hadn't bought a 10 year fix.