The rise of the 10-year fixed rate mortgage

Published: 12/05/2022 By Lucy Goodgame

Last week, the Bank of England raised interest rates to their highest level since 2009, with a 0.25 percentage point increase to 1%, in an attempt to offset rising inflation. This is the fourth increase since the start of December, when the base rate was at 0.1%. With so many increases in such a short period, a growing number of homeowners are seeking to fix their mortgage repayments for as long as possible.

Fixed rate mortgages, which can be fixed for either two, three, five or 10 years, are by far the most popular type of mortgage product in the UK with 75% of UK borrowers choosing fixed rate mortgages. Historically, 2-year and 5-year have been the most common, but the increasing popularity of 10-year deals is testament to growing concerns about interest rate rises and affordability.  

The 20-25% of existing mortgage holders in the UK with standard variable rate, discount deals, or base rate tracker mortgages will see an immediate rise in payments due the interest rate hike. Whilst the 6.75m fixed-rate borrowers won’t immediately be affected by the increase in the base rate, they could face higher borrowing costs when they come to the end of their deal and need to remortgage. And this is the reason that enquiries into 10-year fixed rates mortgages are on the rise.

Hardest hit by interest rate rises are first-time buyers. With inflation, high rent prices, and the higher cost of living eating away at FTB deposits, and interest rates causing their monthly payments to be higher, this may be one of the worst times in history to be trying to get your foot on the housing ladder. Many first-time buyers are having to increase their deposits and explore other lending options to access better interest rates.
With a backdrop of economic uncertainty and soaring costs of living, the proportion of fixed-rate mortgage borrowers opting for five-year fixed rates had already been on the rise in recent years, from fewer than three in ten borrowers in 2017 to around 45% of borrowers in 2021. But now, with speculation that interest rates could reach 3% or higher by the end of the year, 10-year fixed rates are looking like the safest option for many.

New research by Moneysupermarket has revealed that consumer interest in 10-year mortgages is at a historic high, 18.1% compared to 2.9% the year before, as homeowners seek to keep their monthly payments affordable. Meanwhile, the number of borrowers searching for two and three-year fixed-rate mortgages fell by 35% and 57% respectively in April, compared with April 2021.
This demonstrates a growing trend of borrowers seeking financial safeguards of long-term fixed rates, but is this with good reason and what are the potential downsides?

The truth is that UK borrowers have enjoyed 13 years of low interest, and even though they are now on the rise, rates are still extremely low in context. In 1979 interest rates went up to 17% and in the early 1990s they were around 10%. When you consider this, 1% is a comparatively meagre amount, but the reality for many is that paired with the soaring costs of – well, everything really – the idea of paying out more on mortgage repayments is simply too daunting a prospect.

Furthermore, the Bank of England say they now expect inflation to hit 9% in coming months - up from its previous forecast of 8% - and could potentially reach 10.25% by the end of the year, which will likely mean yet more interest rate rises. This rising inflation has led to speculation interest rates could be over three per cent by the end of the year, and each time the Bank of England has raised interest rates since December, lenders have passed on the higher costs to borrowers within hours.  With this in mind, it’s not really a surprise that 10-years fixed at the current rate seems the safest option for many.

Locking into a fixed rate or such a long duration can save homeowners thousands of pounds if interest rates do continue to rise as anticipated but should not be entered into lightly. Much can change in 10 years, and should you find yourself needing to remortgage, sell up, or even be in the fortunate position of being able to pay off your mortgage early, the redemption penalties are significantly higher than for those shorter-term fixed products.

Mortgage brokers advise that, unless you are coming to the end of your fixed term you may be best off staying put as breaking a fixed-term mortgage early often incurs a redemption fee.