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Why the sudden rush of long-term fixed rate mortgage deals?

Barclays has launched the first 10-year fixed rate deal at sub-3 per cent but the sting in the tail remains early repayment charges.

Industry experts say a combination of lower funding costs and regulatory restrictions have led to a surge in the number of 10-year fixed rate deals available in the market.

In May 2013, Money Marketing investigated a rise in the number of 10-year fixed mortgages available across the market, which jumped from 11 in 2012 to 20 by May 2014.

Data from comparison site Moneyfacts.co.uk shows that by November 2014, the number had risen to 51. As of 15 January, a total of 77 10-year residential fixed rate mortgages were available, with Barclays launching the first sub-3 per cent deal earlier this month.

Nationwide managing director for group intermediary sales Ian Andrew says the lower cost of funding has fuelled the rising number of 10-year fixed rates, but believes the impact of the Mortgage Market review has also contributed. The price of 10-year swap rates fell from 2.57 per cent in May 2014 to about 1.56 per cent as of 16 January.

“Of course there is a lower cost of offering these products, which will have helped boost the number of deals in the market and lowered the rates they can be offered at – there are some terrific rates for 10-year deals right now,” Andrew says.

“Lenders are also responding to increasing demand from savvy borrowers who realise they may find it harder to remortgage or obtain a new product in the post-MMR environment, especially mature borrowers who realise as they approach retirement they may have significant problems getting a new deal. There’s been a lot of press around this issue and that will have had an impact.

“If you look at when the number of products started to increase at a quicker pace, it is since the MMR rules came in. You can see that borrowers are starting to understand the impact of the new restrictions and that has to be good for the market. I’d expect to see more lenders offering these deals in the coming months, especially if interest rates remain so low.”

London & Country associate director of communications David Hollingworth says the Barclays 10-year rate is likely to drive further price reductions in the market.

He says: “Lenders are clearly looking at where there are opportunities to do more business since the MMR and 10-year fixes are still a niche product. Obviously, there has been a big rise in the number of products available in the market but it is still amongst a small concentration of lenders.

“Barclays have launched a barnstorming rate at 2.99 per cent, which almost forces the pace of the market. Swaps rates have come down for long-term money and lenders clearly see that as an opportunity to grow their long-term product offerings. We’ll see more 10-year fixes over the year and from a wider range of lenders.”

While Barclays’ headline rate may be attractive to borrowers, Bthe product applies an early repayment charge of 6 per cent of the outstanding balance for the first seven years, and 3 per cent for the remaining three years.

TSB Bank’s 10-year offering has a headline rate of 3.44 per cent but the early repayment structure allows borrowers to repay up to 10 per cent of the balance without a charge in the first five years. From year six, borrowers can repay as much as they want to with no penalty applied.

John Charcol senior technical manager Ray Boulger says: “The issue with 10-year fixes is not always rate – lenders need to address the issue of early repayment charges because very few people know where they will be 10 years from now. Nobody wants to be locked in for that long and facing a hefty penalty if they redeem ahead of time.”

Trinity Financial product and communications manager Aaron Strutt says 10-year mortgage deals are likely to remain niche despite the recent surge in product launches.

He says: “Rates for 10-year deals remain significantly higher than two-year fixes and I think mass demand will opt for the cheapest possible deal.

“Product choice is growing but 10-year fixes will remain niche, even if we see the number of different lenders offering those products increase over the coming months.”

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