Pay 5% on your mortgage for a decade

Some mortgages are very under-rated and any serious contrarian should consider them.

My favourite mortgage right now is a ten-year fixed-rate mortgage. It's not my favourite because it's suitable for everyone, as it certainly isn't. It's my favourite because it's one of the most under-rated mortgages and I like underdogs.

With mortgages, underdogs often end up doing better.

Why are these mortgages under-rated?

No one likes these mortgages for two reasons. The first problem is how people try to value fixes. They look at interest rates now and try to guess where they'll be in the next two years. Even if you get lucky with your forecast, it's not all that good when these mortgages are talking about the next ten years.

My own research has found that over the past 15 years, an average mortgage interest rate of around 5% would be the best you could have possibly got over a ten-year period – and this is assuming that you switched to the right type of mortgages every time you switched during those ten years. What's more, if you look back over a longer period of time, the best you could have hoped to do by twisting through the different deals over the years is more like 8%.

Currently, the best ten-year fixes are around 5%, which means historically, at least, it's a good rate.

I said there were two reasons ten-year fixes are under-rated, so here's the second: many borrowers feel they can wait on their variable rates (or short-term fixed rates, which are cheaper than long term ones) until it looks like rates are rising, and then they'll lock in a long fix and they'll be better off.

That is a huge assumption. Good long-term fixed rates will disappear long before the majority of people can get hold of them. They'll sell out and be replaced rapidly by more expensive versions. That is at least what has happened historically. Then most mortgage customers will have the dilemma of having to buy a much more expensive fix, or gnashing their fingers as they hold on to what could become a variable-rate roller coaster. That's not a fun situation to be in.

So, getting into a decent long-term fix now whilst rates are at historic lows and before people start believing they'll rise can make sense for many people.

Current ten-year fixed-rate deals

I've had a look for the latest ten-year deals. I've based this table on a £175,000 property with £104,000 left to pay over 15 years. Here's what I found:

*I've included all fees where appropriate, such as arrangement, booking, legal and exit fees, and assumed you'll add the arrangement fee to the loan.

**LTV equals loan-to-value and shows the maximum percentage of the current value of your property you can borrow. An LTV of 70% means you need a deposit of 30%.

I've rounded all the numbers, e.g. those wasteful zero point 99s. (4.99 becomes 5, 5.29 becomes 5.3 and so on.) The above figures are based on re-mortgaging. All of the above are available to buyers and movers as well, but the costs may be higher.

Here's a little more about each mortgage:

Principality Building Society's fix of 5.3% has a £1,000 arrangement and booking fee. (Remember, all fees are taken into account in my table in the column 'Total cost over 10 years'.) It has a massive early-repayment penalty of at least 8% if you leave within ten years and a £150 exit fee when you switch away or pay off the mortgage.

You can transfer your mortgage so long as you transfer the whole lot, but you can't add to it, meaning you may have to take out a second mortgage, which limits your options. There are huge penalties for making overpayments, too.

Britannia and Co-operative Bank (they're part of the same group) also have a fix at 5.3%. The arrangement and booking fee is again £1,000 and the exit fee £140. For the first six years you'll pay a 6% early-repayment charge and thereafter this decreases by one percentage point per year, stopping at the end of the tenth year.

This is more flexible than Principality's mortgage, because you can overpay each year by 10% of the previous year-end's balance. Again, the mortgage is portable but you can't add to it.

Yorkshire Building Society (don't confuse with Yorkshire Bank) has the best interest rate at 5% and is the cheapest overall after fees. The arrangement and booking fee is £500.  The early-redemption charge is 7% for three years, then 6% for two years, 4% for two years, 2% for two years and finally 1% for one year. The exit fee is £90.

Legal and valuation fees are not included for re-mortgagors, whereas they are for the other three mortgages. However, this mortgage is portable and you can overpay by 10% per year.

Coventry Building Society sits in the middle, charging 5.2% and a £1,000 arrangement and booking fee. The early-redemption charge is 4% at any time during the 10-year deal. There's a £125 exit fee.

This mortgage will allow overpayments of 5% per year.

'Favourite' doesn't equal 'suitable for all'

Remember, these are not by any means suitable for everyone. Offset mortgages will be more appropriate for many people with lots of savings, trackers may be more suitable for those who can overpay and afford higher interest rates if they sky-rocket, and variable rates may be suitable for people with just a few years left to pay off. That's merely for example: we're all different so there are far too many variables for me to go into the alternatives in a single paragraph.

If you want personalised recommendations, try our Q&A tool, or get advice through either instant messaging (during office hours), email or by telephone through our unique mortgage service.

More: House prices: what the forecasters are saying | New rules will push up your mortgage rate!