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Should you take out a seven-year fixed-rate mortgage?

Skipton Building Society has launched a new mortgage that bridges the gap between five- and 10-year deals. But is it just a gimmick, or could we be set to see more unconventional offers coming to the market? Here, we take a look at Skipton’s new deal in the context of the wider mortgage market, and offer advice on whether a long-term fix is really a good idea for homebuyers.

  • If you’re considering buying a home and need some impartial, expert advice on your mortgage options, call Which?

    Mortgage Advisers[1] on 0808 252 7987.

Skipton launches seven-year fixed-rate mortgage

Skipton’s seven-year fixed rate deal, which is fee-free and has an initial rate of 2.99% at a maximum loan-to-value of 90%, allows buyers to lock in their mortgage rate for longer than the traditional two and five-year terms. This mortgage offers long-term rate security, while stopping short of the protection offered by 10-year fixed-rate mortgages[2] that are now slowly beginning to creep up in cost, having previously hit all-time lows. Longer-term fixes have increased in popularity due to the uncertain economic climate, with the prospect of drawn-out Brexit talks and another increase in the Bank of England base rate[3] later this year prompting more homeowners to lock in a decade-long deal.

This might seem overly cautious but, in truth, it often only takes speculation to affect ‘swap’ rates (the cost of borrowing between banks) – and changes are usually passed down to consumers sooner rather than later.

Are seven-year deals set to become more popular?

Whether this offer will remain niche or is a step ahead of the game remains to be seen, but at this stage there’s little indication of other lenders following suit. Skipton’s mortgage is one of only nine of its kind currently on the market, with Coventry Building Society and the Bank of Ireland the only other lenders providing similar offers. There’s no sign of a surge in unusual mortgage terms elsewhere, either.

  • One-year fixed-rate deals: there are 13 one-year deals available, although the majority of these are specialist products such as larger loans for over GBP500,000.
  • Four-year fixed-rate deals: there are currently 30 four-year deals on the market through Lloyds – though these are only on offer to remortgagers.
  • There are no six-, eight- or nine-year mortgages currently available.

This all means that two products are still very much dominating: of the 4,638 fixed-rate mortgages on the market, 3,778 (81%) are for two or five-year terms.

Best rates at different loan-to-value levels

Attractive rates remain available at all levels of the mortgage market, despite the recent increase in the base rate. The chart below shows how seven-year deals (including Skipton’s) fit into the mortgage landscape in terms of interest rates at different loan-to-value ratios. As you can see, these deals are broadly competitive at each level when compared with their more traditional peers.

The pros and cons of long-term fixing

Long-term fixing can offer peace of mind and protection against economic issues, plus the certainty of knowing what your mortgage will cost every month for the foreseeable future.

However, it’s by no means the right choice for everyone. First of all, you’ll usually need to be sure you’re not going to move home within the timeframe: even if the deal is portable, like Skipton’s, that’s only useful if you’re not going to need a bigger mortgage for your next property. If you need to get out of the deal before the initial period is up, things could get expensive.

The Skipton seven-year mortgage will charge you 7% if you exit in the first three years, falling by 1% annually from the fourth to the seventh year.

Competition is good for consumers

Seven-year deals might not be about to dominate the market, but they do provide an interesting alternative for those who want security but feel a 10-year fix is too long. David Blake, of Which? Mortgage Advisers, says: ‘Some lenders will look to target an area of the market that isn’t yet saturated with mortgage products, with the idea of increasing business and their share of the market.

‘It’s great that lenders are giving people more choice. Some people will find the unique length of these products specifically matches their future plans, while others might just find them to be competitive and feel the timescales suit them most appropriately. ‘Either way, more choice in the mortgage market is a good thing, but it also increases the importance of seeking advice.’

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029).

Which? Mortgage Advisers and Which? Money Compare are trading names of Which?

Financial Services Limited.

References

  1. ^ Which?

    Mortgage Advisers (mortgageadvisers.which.co.uk)

  2. ^ fixed-rate mortgages (www.which.co.uk)
  3. ^ Bank of England base rate (www.which.co.uk)

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