30 August 2022

10-year fixed rates with five-year ERCs offer the best of both worlds

By Alison Pallett, Board Adviser at LiveMore

Most brokers in recent years have tended to advise borrowers to take a two or five-year fixed rate mortgage.  People can sometimes look at longer-term products, for example 10-year fixed rates, with a perception of being stuck with it unless they buy their way out.

However, that is no longer the case and with so much uncertainty in today’s economy, now is the time for brokers to bring 10-year fixed rates into the mortgage mix – particularly as they evolve to give borrowers the flexibility they need.

People’s circumstances change and they may need to exit their mortgage for a variety of reasons. And while early repayment charges (“ERCs”) are necessary to safeguard the lender’s risk, our opinion is that they don’t have to be so onerous as to put borrowers off a longer-term fixed rate that could be beneficial to them.

While some lenders offer 10-year fixed products with ERCs for the full 10 years, we have looked at this issue very carefully and are one of the few lenders to reduce ERCs to only the first five years.

This means that while borrowers may have the certainty of a 10-year fixed rate, in effect it can be viewed as a five-year commitment with up to a five-year extension. It offers borrowers choice and the freedom to leave a 10-year fixed rate mortgage, penalty free, after just five years. Or the option to carry on with the same monthly payment without needing to remortgage.

We think this gives borrowers the flexibility they might need to navigate such uncertain times. That’s why our ERCs are reduced across our long-term fixed rate products, including 20-year fixed rates and our fixed-for-life product.

Shortened ERCs can be particularly beneficial for older borrowers as it provides flexibility in later life, whether they are 50 or 90 years old.

There are also situations where a borrower would pay no ERCs at all with our mortgages. For example, experiencing a major life event such as having to sell the property due to the death of a partner or moving into long-term care.

We always recommend that advisers are upfront with clients about ERCs, and short ERCs are not only easier for brokers to explain – they are fairer for the borrower.

Meanwhile, shortened ERCs are not the only reason to consider long-term fixed rate mortgages. Changes in the economy, both nationally and globally, are bringing new dynamics into mortgage options.

Rising rates and inflation

Since 2009, the base rate of inflation had been under 1%. However, that is no longer the case. The Bank of England has raised the base rate six times in a row, now standing at 1.75% - and it is likely to go up again. The latest increase of 0.5% was the largest in 27 years.

The most obvious contributory factor to this is the rapid rise in inflation – currently 9.4% but the Bank has indicated it will go up to 13%. We are likely to be in a high inflationary environment for a couple of years and given the uncertainty this creates for interest rates, it could be a great time to consider a long-term fixed rate.

Advantage of fixing for 10 years

The cost of living, inflation, gas and electricity bills are skyrocketing and could be even worse next year. But in securing a fixed rate mortgage for 10 years, borrowers have peace of mind that their mortgage payment remains the same for the next 120 months.

We don’t know what the base rate will be in 10 year’s time but interest rates have been the lowest ever for the past 13 years, and they’re unlikely to stay that way forever.

After all, rates are forecast to go one way in the foreseeable future, and that is up. If you consider that base rates of 5% and 6% were ‘normal’ pre financial crisis and mortgage rates were even higher, today’s rates are by comparison still relatively low.

If you are interested in securing your customers on a fixed rate mortgage, give us call on 0203 011 4991 or email sales@livemorecapital.com where our team will be happy to help you. Alternatively, you can visit our website at www.livemorecapital.com/intermediaries.

(This article was originally written for and published by Mortgage Strategy on 16.08.22)

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