10-Year Fixed Rates – A Bad Idea For First-Time Buyers?
10-Year Fixed Rate Mortgages Could Add An Extra £12k To Mortgage Repayments
Stroud & Swindon, the UK’s 14th largest Building Society, today revealed that the Chancellor’s call for more 10-year fixed rate mortgages could end up being a very expensive option for first-time buyers.
As part of the recent pre-budget report, Chancellor Alistair Darling suggested 10-year fixed rate mortgages would be a good way of helping first-time buyers to get on the housing ladder. His reasoning was that a long-term fixed mortgage would allow borrowers to fix repayments and allow them to budget accordingly.
However, research carried out by Stroud & Swindon has revealed that over the past 10 years borrowers could well have been better off if they had taken out a series of two-year fixed mortgages or a variable rate mortgage.
Table 1 – 10-year, 2-year and variable rate mortgage comparisons over 10 years (October 1997 and October 2007).
| Mortgage Type |
Interest Only Total Cost |
Repayment Total Cost |
| 2-year Fixed Rate |
£60,599.76 |
£77,903.76 |
| Variable Rate |
£68,899.54 |
£80,340.97 |
| 10-year Fixed Rate |
£72,999.60 |
£88,141.20 |
A 10-year fixed rate mortgage taken out on a £100,000 property in 1997 would have had a rate of 7.3% resulting in repayments of £88,141.20 to date. If, however, the borrower had taken out a standard variable rate mortgage in 1997 the repayment to date would be £80,340.97, saving £7,800.23.
Overall, the most cost effective option would have been to take out a series of five 2-year fixed mortgages that would result in a repayment of £77,903.76. This is a significant saving of £10,237.44, greatly outweighing the costs of any additional fees paid along the way for re-mortgaging.
Commenting on the Chancellor’s proposal, Paul Chafer, Sales Director at Stroud & Swindon, said: “Whilst it is obvious that something needs to be done in order to help first time buyers get on the housing ladder, the current 10-year mortgage deals are not necessarily the right solution. First-time buyers are usually on a very tight budget so any saving they can make on their mortgage repayment helps. This research shows that long-term fixed rate mortgages are not always the most cost effective option.
“What is required is a flexible solution that allows borrowers to borrow more or less on their mortgage on a regular basis if and when their circumstances change. First-time buyers will obviously be looking to move up the property ladder so will not want to be tied into a long-term mortgage. However, this type of product could, in certain interest rate climates, be the perfect answer for borrowers who have moved into a property that they intend to stay in for a significant period of time.”
Aside from the obvious cost implications, Stroud & Swindon believe 10-year fixed rate mortgages may not be suitable for first-time buyers due to difficulty in borrowing additional funds. The need to borrow additional funds when the time comes to move properties could also be problematic if the borrower is locked into a 10-year mortgage. Unless the mortgage is flexible they will be forced to borrow from their existing provider at a rate set by the company. This is unlikely to benefit the borrower, as lenders traditionally do not offer the best rates to existing borrowers.
Paul Chafer comments:
“Whilst long-term mortgages may not be the best option for first-time buyers it does not mean they are unsuitable for all buyers. A long-term
product taken out at a time of low interest rates can end up saving the borrower a large amount of money if interest rates then rise.”
~ENDS~
For further information please contact:
David Greenleaf
Corporate Communications Manager
Stroud & Swindon
01453 768244
Lee Blackwell / Suman Katyal / Karen Butcher
The Wriglesworth Consultancy
020 7845 7900
Notes for Editors
About Stroud & Swindon Building Society:Stroud & Swindon is the 15th largest building society in the UK with assets in excess of £2.8 billion. The Society operates through a dedicated team of intermediary business development managers, with a branch network of 22 offices and 20 agencies in the South West, complemented by a direct call centre based in Stroud and website www.stroudandswindon.co.uk.
Methodology
*All calculations assume £100,000 borrowed over 25 years. The repayments are between October 1997 and October 2007.
- 10 year fixed rate. Source: Stroud & Swindon
7.3% 10 year fixed rate is based on swap rates in October 1997 of 6.8% for 10 years. Total repayment £88,141.20. Total interest only £72,999.60
- 2 year fixed rates. Source: Moneyfacts
October 1997 - 7.54% for 2 years. Repayment £17,798.16 (Interest only £15,079.92)
October 1999 – 6.54% for 2 years. Repayment £16,265.04 (Interest only £13,080.00)
October 2001 – 6.10% for 2 years. Repayment £15,610.32 (Interest only £12,199.92)
October 2003 – 4.90% for 2 years. Repayment £13,890.72 (Interest only £9,799.92)
October 2005 – 5.22% for 2 years. Repayment £14,339.52 (Interest only £10,440.00)
Total £77,903.76. Total interest only £60,599.76
- Variable rates. Source: Moneyfacts based on Halifax standard variable rate
| Dates |
Rate |
Number of Days |
Repayment Cost |
Interest Only Cost |
| 01/08/2007 - 30/09/2007 |
7.75% |
x 60 Days |
£2,452.63 |
£1,270.49 |
| 01/06/2007 - 01/08/2007 |
7.50% |
x 61 Days |
£4,910.09 |
£1,250.00 |
| 01/02/2007 - 01/06/2007 |
7.25% |
x 120 Days |
£3,384.85 |
£2,377.05 |
| 01/12/2006 - 01/02/2007 |
7.00% |
x 62 Days |
£805.79 |
£1,185.79 |
| 01/09/2006 - 01/12/2006 |
6.75% |
x 91 Days |
£797.88 |
£1,678.28 |
| 01/09/2005 - 01/09/2006 |
6.50% |
x 365 Days |
£763.64 |
£6,482.24 |
| 01/09/2004 - 01/09/2005 |
6.75% |
x 365 Days |
£674.07 |
£6,731.56 |
| 01/07/2004 - 01/09/2004 |
6.50% |
x 62 Days |
£1,403.01 |
£1,101.09 |
| 01/06/2004 - 01/07/2004 |
6.25% |
x 30 Days |
£3,478.59 |
£512.30 |
| 01/03/2004 - 01/06/2004 |
6.00% |
x 92 Days |
£1,395.77 |
£1,508.20 |
| 01/12/2003 - 01/03/2004 |
5.75% |
x 91 Days |
£1,447.33 |
£1,429.64 |
| 01/08/2003 - 01/12/2003 |
5.50% |
x 122 Days |
£690.53 |
£1,833.33 |
| 01/03/2003 - 01/08/2003 |
5.65% |
x 153 Days |
£8,873.76 |
£2,361.89 |
| 01/12/2001 - 01/03/2003 |
5.75% |
x 455 Days |
£1,434.98 |
£7,148.22 |
| 01/11/2001 - 01/12/2001 |
6.25% |
x 30 Days |
£711.96 |
£512.30 |
| 01/10/2001 - 01/11/2001 |
6.50% |
x 31 Days |
£2,064.03 |
£550.55 |
| 01/09/2001 - 01/10/2001 |
6.75% |
x 30 Days |
£655.87 |
£553.28 |
| 01/06/2001 - 01/09/2001 |
7.00% |
x 92 Days |
£661.62 |
£1,759.56 |
| 01/05/2001 - 01/06/2001 |
7.25% |
x 31 Days |
£624.81 |
£614.07 |
| 01/03/2001 - 01/05/2001 |
7.50% |
x 61 Days |
£9,025.75 |
£1,250.00 |
| 01/03/2000 - 01/03/2001 |
7.74% |
x 365 Days |
£2,946.35 |
£7,718.85 |
| 01/02/2000 - 01/03/2000 |
7.49% |
x 29 Days |
£2,300.81 |
£593.47 |
| 01/12/1999 - 01/02/2000 |
7.24% |
x 62 Days |
£1,749.38 |
£1,226.45 |
| 01/10/1999 - 01/12/1999 |
6.99% |
x 61 Days |
£1,805.12 |
£1,165.00 |
| 01/05/1999 - 01/10/1999 |
6.85% |
x 153 Days |
£600.73 |
£2,863.52 |
| 01/03/1999 - 01/05/1999 |
6.95% |
x 61 Days |
£1,269.51 |
£1,158.33 |
| 01/02/1999 - 01/03/1999 |
7.45% |
x 28 Days |
£7,633.32 |
£569.95 |
| 01/01/1999 - 01/02/1999 |
7.70% |
x 31 Days |
£7,386.00 |
£652.19 |
| 01/12/1998 - 01/01/1999 |
8.20% |
x 31 Days |
£1,865.35 |
£694.54 |
| 01/11/1998 - 01/12/1998 |
8.70% |
x 30 Days |
£1,297.31 |
£713.11 |
| 01/07/1998 - 01/11/1998 |
8.95% |
x 123 Days |
£2,564.50 |
£3,007.79 |
| 01/01/1998 - 01/07/1998 |
8.70% |
x 181 Days |
£1,329.91 |
£4,302.46 |
| 01/10/1997 - 01/01/1998 |
8.45% |
x 92 Days |
£1,335.71 |
£2124.04 |
|
|
Total |
£80,340.97 |
£68.899.54 |