Super-long fixed rate mortgage deals continue to make a comeback, as Virgin Money launches the first 15-year fix since 2008. The mortgage is available for buyers with surprisingly low deposits – but such long deals may not be right for every buyer. Article by Nick Green.
The first 15-year fixed rate mortgage in a decade has come onto the market, offering homebuyers longer-term certainty over their mortgage repayments. Offered by Virgin Money, the deal is available on a number of different terms, with rates that vary depending on loan-to-value (LTV) ratio and whether or not the borrower wants to pay an upfront fee.
People buying a home or remortgaging can therefore fix the interest on their mortgage repayments as low as 2.55 per cent for the next 15 years, protecting themselves from potential rate rises over this period. The downside is that if interest rates don’t rise in that time, these borrowers will end up paying more than they needed to, and will not be able to leave their fixed-rate deal early without paying a hefty fee.
Is a 10- or 15-year fixed mortgage a good idea?
Long-term fixed rate deals have been rare since the 2008 financial crisis, with lenders becoming much more risk-averse. The 10-year fix made a cautious reappearance in 2015, but is still offered by only a few providers, while Virgin Money’s is currently the only 15-year fixed rate mortgage available. However, outside the UK such long-term fixes are much less unusual – in Germany, for instance, 10 years is the standard, and some lenders even offer 20 years. A different attitude prevails among German homebuyers, who would rather pay more but be certain, than take the chance of saving money at the risk of losing more than they can afford. Ultimately, it comes down to the borrower’s own attitude to risk.
What are the rates on this 15-year fixed mortgage?
The interest rates on Virgin Money’s 15-year fixed rate mortgage vary from 2.55 per cent to 4.58 per cent. The lowest rates are available to those with the lowest LTV ratio (i.e. the biggest deposit or most equity) who are willing to pay a £995 arrangement fee.
|
LTV |
Rate with £995 fee (£300 cashback) |
No fee |
|
65% |
2.55% |
2.89% |
|
75% |
2.75% |
2.99% |
|
85% |
2.99% |
3.19% |
|
90% |
3.45% |
3.75% (£300 cashback) |
|
95% |
n/a |
4.58% (£300 cashback) |
These rates are considerably higher than would be paid on most 2- or 5-year fixed rate mortgage with comparable LTV ratios and fees. This would result in significantly higher payments over the respective mortgage terms.
How does a 15-year fixed mortgage compare?
For comparison, here are some of the most competitive no-fee mortgages available (assuming a £250,000 mortgage on a £300,000 home).
|
Fixed-rate term |
Lender |
Interest rate |
Total repaid over first 2 years |
|
2 |
Post Office Money |
1.99% |
£25,452.08 |
|
5 |
Post Office Money |
2.26% |
£26,247.68 |
|
15 |
Virgin Money |
2.99% |
£28,746.52 |
The 15-year fixed rate mortgage would mean monthly repayments of £1,184.23 (as compared to £1,058.42 for the 2-year mortgage shown here), resulting in a total of £3,294.44 extra being paid over the first two years of the mortgage.
The cheaper mortgages would of course revert to the lender’s higher Standard Variable Rate (SVR) at the end of their respective terms. However, the borrowers should be able to remortgage to get new deals. Even though this may incur fees, these are likely to total below £1,000 and so would not come close to the extra costs of the 15-year fixed rate mortgage.
If (and it may be a big ‘if’) a borrower can continue to find 2-year fixed rate deals at similarly low rates, then over the 15 years they would save around £20,000 compared to a borrower on the 15-year fixed rate, even factoring in remortgaging fees.
In this scenario, the holder of the 15-year fixed rate mortgage only wins if interest rates rise significantly in the space of those two years. At present this seems unlikely, though it’s worth remembering that they were much higher 10 years ago:
What if I repay a 15-year fixed mortgage early?
You’ll usually have to pay a significant early repayment charge (ERC) if you pay off a long-term fixed rate mortgage early (e.g. by remortgaging). For the Virgin Money 15-year fixed deal, this would be 8 per cent in the first five years, 7 per cent up to year 10, then falling by steps to 1 per cent in year 14. So if you wanted to switch mortgages after nine years, then (based on the borrowing levels described above) your ERC penalty payment would be around £14,413. In other words, it would be prohibitively expensive unless you wanted to switch in the last few years of the deal.
Can I make overpayments on the mortgage?
You can however make overpayments on your 15-year fixed rate mortgage, and so pay it off slightly early. Virgin Money allows you to pay 10 per cent more per year without incurring an ERC. This would settle a 25 year mortgage in around 21 years instead, and mean paying back a smaller total amount.
Who might be suited to a 15-year fixed mortgage?
A very long fixed mortgage term may not be suitable for a first-time buyer, who is likely to need to remortgage much sooner as they move up the property ladder. Such a long term deal is probably more suited to settled homeowners who have no plans to move in the next 15 years, or those with exactly 15 years left on their mortgages who want to minimise risk during this time.
For other homebuyers, the best strategy may still be a series of shorter mortgage deals linked by regular remortgaging. A mortgage broker can make this a less onerous process, and can also help to keep remortgaging fees to a minimum.
