Why long-term fixed rate mortgages are getting cheaper

You don't just get financial security with a long-term fixed rate mortgage - the costs of the deals are falling too!

Brits are traditionally shy of long-term fixed rate mortgages because they require a long-term commitment, and we aren’t really used to that when it comes to our mortgages.

That is partly to do with us wanting a degree of flexibility. But it's also because the industry has always offered and promoted short, two-year fixed deals. Indeed these still account for a large proportion of all the mortgages on offer today – 30% according to Defaqto.

But in recent years we have started to fall for the obvious appeal of long-term fixed rates, especially as wider interest rate movements have lowered their cost. After all, it was really only the premium of five-year fixes that put many borrowers off.

So what’s changed?

Deeper and down

Mortgage rates in general have fallen over the last three years, as a result of the fall in base rate. But more specifically ‘swap rates’ - which reflect the cost to lenders of borrowing fixed rate funds - have also fallen. And they impact directly on the cost of fixed rate mortgages, as we explained in How are mortgage rates decided?. This is particularly noticeable with longer-term rates.

According to financial information provider Moneyfacts, the average five-year fixed rate has decreased significantly over the past year, from 5.59% to 4.86% today.

This can be attributed to a fall in five-year swap rates, which have decreased from 2.99% in April 2011 to just 1.7% now.

In fact, average rates for five-year fixed rate mortgages have fallen steadily for the past two years (they were 5.87% in April 2010), and there has been a corresponding increase in interest from borrowers.

For good reason, because in the current market, long-term fixes are looking very appealing indeed.

Benefits of five-year fixes

Cheap as chips: OK, five-year fixes are never going to be the cheapest deals on the market because you expect to pay a premium for five whole years of payment security. But they are probably never going to be available at such a narrow margin to shorter fixed rates or even variable deals. Today’s long-term fixes are cheap by historical standards, with best buy five-year rates starting from a staggering 3.59%.

Payment security: Your payrate is set in stone for five years, no matter what happens to interest rates. This means you are protected from rate rises, able to plan your family finances and budget effectively without having one wary eye on the Bank of England and what it will do with the base rate.

No more switching: Fancy the freedom to forget about your mortgage for a while? Let’s face it, the mortgage is a necessary evil when you want to buy a home, and it can also be time consuming. If you fix for five years rather than two you completely eliminate an entire remortgage process in 2014, because you are sticking with your rate until 2017. This means you don’t have to research the market, fill in any forms, or speak to a bank or broker. Or do anything at all apart from get on with your life.

Save money on fees: Mortgage arrangement fees are shockingly high. According to Moneyfacts the average fee is £1,502, and this has shot up 25% over the last three years. If you lock in for five years you only pay that huge amount once in five years, rather than every two years. And that saving could offset, or even outweigh, any premium in payrate you pay for the longer-term deal.

Who do they suit?

Most borrowers can benefit from locking into a long-term fixed rate. After all, an element of security over your largest monthly outgoing is appealing to many people.

However, it’s important to understand that long-term fixes are a long-term commitment, so they are best for those who do not anticipate their lives changing dramatically in the next few years. These often tend to be homeowners who are settled in their family home and don’t plan on moving.

The reason for this is that fixed rates apply something called early repayment charges (ERCs) if you try to move before your fixed period is up. These penalties vary but tend to be around 1-3% of your outstanding mortgage balance, so can add up to thousands.

Equally, if you decide to move house you may be liable to pay ERCs, which is why long-term deals are not always suitable for those who are planning to move in the next few years. Many lenders will tell you their mortgages are portable without penalty, and can therefore be moved to a new property, but there are increasing reports about this not always being the case in practice, especially if your circumstances have changed since you initially took out the mortgage.

Finally, it is worth remembering that long-term fixes are currently cheap because there is an expectation that wider interest rates will stay low for longer. In this context, a variable rate would be a cheaper option, but it does come with the potential to rise if the economic experts are wrong.

The only way to set your rate in stone for the long term is to fix it. Below are some of the best deals around for those who want to fix for a minimum of five years.

Big deposit (25% and over)

Small deposit (less than 25%)

More on mortgages:

The top eight variable mortgages

How are mortgage rates decided?

Get a great mortgage for free!

Five reasons why you need to remortgage today

The top 10 fixed rate mortgages