The lowest ten-year fixed-rate mortgage to date was launched last week, as lenders continue to undercut each other in an increasingly competitive market. HSBC started the ball rolling last Thursday, announcing it would immediately begin offering a fee-free ten-year fixed-rate mortgage at 2.79%.
Within hours, the deal was beaten by Coventry Building Society, offering a ten-year fix at the all-time low rate of 2.39% with a product fee of £999 (a fee-free equivalent of 2.69%). In the following days, West Bromwich Building Society and Barclays also unveiled competitive ten-year fixes of their own.
Why the flurry of changes? It would be easy to scapegoat Brexit. But even before the EU referendum, there were signs that fixed-rate loans could fall as yields on “safe” government bonds started to drop. Falling bond yields allow banks to offer cheaper loan deals, as they can lock in the lower rates themselves.
Banks have been given further impetus to lend by the Bank of England’s decision to release them from a requirement to hold as much capital. The move, intended to keep credit flowing post-Brexit, has freed many institutions up to lend a further £150bn to households and businesses.
These ten-year deals are tempting if you are in a position to fix for that long, but do think carefully about taking the plunge. The deals may be cheap, but they are usually not flexible. Most fixed-rate mortgages come with early repayment fees, meaning that if you need to move house before the end of the ten-year period and can’t take the mortgage with you, it may cost you.
The Coventry Building Society will charge 5% if you need to redeem in the first two years, 3% over the next three years, and 1% in the last five. For a slightly higher rate, it’s possible to build in a little more flexibility. TSB offers a ten-year fix at 3.19% – it’s subject to early repayment charges for the first five years (dropping from 5% to 1% during that time), but you will be able to switch after that.
“It comes down to whether you want certainty around your rate for ten years and risk a charge to leave in year seven, or be risk averse and pay more,” says Alistair Hargreaves of mortgage broker John Charcol. If you’re looking for something that doesn’t lock you in for quite so long, HSBC is currently offering a five-year fix at a rate of 1.99% for a £999 fee, if you can stump up a 60% deposit. Coventry offers a five-year fix at 2.45% with no early repayment charge if you’re worried that your circumstances may change in that time.
Bank overdrafts versus payday loans
Running up an unarranged overdraft from your bank can be up to 12 times more expensive than the cost of a payday loan, according to consumer group Which? The research found that going overdrawn by £100 for 29 days could costs as much as £90 in charges at some banks, compared with the maximum £22.40 on a payday loan. Royal Bank of Scotland is among the worst offenders – allowing a £10 buffer then charging £6 a day up to a maximum of £90 in any 30-day period. TSB, Lloyds and HSBC all charge up to £80, while some Halifax accounts charge up to £100.
Given that personal loan rates have fallen, and lenders are providing better credit-card deals than ever, it seems odd that unauthorised overdraft fees remain so high. The Treasury Select Committee has demanded that banks explain the reasoning for the fees, while campaigners are urging regulators to place price caps on overdraft fees – like the upper limit placed on payday loan fees last year.
We hope that most MoneyWeek readers aren’t relying on their overdrafts, but if you are in that position, you can avoid the worst fees by moving to a more competitive account, or one without an unauthorised overdraft facility. Nationwide’s FlexDirect offers a 12 month fee-free overdraft, moving up to 50p per day after one year.