Virgin Money has launched the first 15-year fixed-rate mortgage since the financial crisis, but does it really make sense to lock yourself into a deal for a decade and a half?
At a time of low mortgage rates and uncertainty around Brexit, many borrowers are seeking to fix their mortgage rates for longer, with five-year introductory periods now commonplace and some lenders offering 10-year deals.
Virgin Money has now gone one step further, by launching a comprehensive range of 15-year mortgages available to both homebuyers and remortgagers.
But should you get one? Read on to find out more.
Virgin launches first 15-year fix in a decade
Virgin Money has launched a series of 15-year fixed-rate mortgages at 65% to 95% loan-to-value (LTV).
This is the first time a lender has offered a fixed-rate deal of longer than 10 years since before the financial crash, when now-defunct banks such as Abbey National and Northern Rock offered up to 15-year terms.
Virgin’s new range is very flexible, with borrowers able to choose between a lower initial rate with a £995 fee, or a higher rate with no upfront fee.
|LTV||Rate with £995 fee (£300 cashback)||Fee-free rate|
|90%||3.45%||3.75% (£300 cashback)|
|95%||n/a||4.58% (£300 cashback)|
It’s Virgin’s 95% deal that provokes the most intrigue – at this LTV, there’s no fee-paying option. 10-year fixes at 95% are still a relatively new phenomenon, let alone 15-year deals.
Virgin’s 95% 15-year fixed-rate deal come fee-free and with £300 cashback, although the initial rate of 4.58% is very high at a time when a 95% five-year fix can be obtained for less than 3%.
When Which? asked Virgin Money if these mortgages could be classified as risky lending, a spokesperson said: ‘We have additional controls in place for higher LTV applications to ensure we are lending responsibly.
‘We believe there can be lower risk with longer term fixed-rate loans as the customer has certainty over monthly repayment amounts and will not be affected if there is an increase in interest rates.’
Virgin’s additional controls include lending at a maximum of 4.49 times annual income at 90% LTV or above, compared with a maximum five times income at 65% to 85% LTV.
How do Virgin’s deals compare with 10-year fixes?
Fixing your mortgage for a decade might have seemed excessive a few years ago, but 10-year fixes are now widely available at most LTV levels.
It’s impossible to compare Virgin’s 15-year fixes like-for-like, as no other products exist in this area. So, if you want a long-term fixed-rate, the big question is should you opt for 15 years over 10?
In the graph below, we’ve put together the best rates currently available on 10-year fixes at different LTVs.
As you can see, Virgin’s 15-year rates range from between 0.2% to 0.75% more expensive than the best rates on 10-year fixes.
15-year fixes: porting, ERCs and overpayments
Longer-term fixes tend to come with significant early-repayment charges (ERCs). These could leave you with a bill of thousands of pounds should you want to end the deal early, for example by paying back the loan.
That’s certainly the case Virgin’s new range, which comes with ERCs as high as 8% in the first five years. That would equate to £20,000 on a £250,000 loan.
|Year||Early repayment charge|
While these figures might cause concern, you won’t necessarily need to pay them if you move home in the 15-year period.
When Which? asked Virgin about the structure of its ERCs, it told us that borrowers who take their mortgage with them when they move (known as porting) won’t need to pay ERCs if they are increasing their borrowing or keeping it at the same level. Those borrowing less money, however, would need to pay the charges.
Virgin points out that these terms are ‘subject to underwriting criteria at the time’, so if regulations around mortgage lending change, you could still face difficulties switching deal.
Making overpayments on a 15-year deal
Many longer-term mortgages allow you to overpay a proportion of the balance each year, helping you to reduce the overall term of your loan.
This can help you get ahead of the game while mortgage rates remain relatively low.
Virgin’s mortgages all allow overpayments of up to 10% of the balance each year; any more, and you’ll need to pay the ERCs listed above.
Should you fix for 15 years?
With rates below 3% at up to 85% LTV (with a £995 fee), Virgin’s deals are priced competitively, and the ability to choose a fee-free product adds a versatility that could attract some borrowers.
Virgin is marketing these deals based on peace of mind over your interest rate. But there’s no indication that the Bank of England base rate will increase this year (it could even decrease), so there seems little likelihood of mortgage rates spiralling out of control any time soon. This means a 15-year fix could be overly cautious, a ‘belt-and-braces’ choice.
Borrowers with small deposits might be best looking elsewhere, as the 95% rate of 4.58% outweighs the lack of an upfront fee and £300 cashback. Borrowers with smaller deposits could instead consider locking in a cheaper five-year deal or a two-year fix, and then re-evaluating their options at the end of the term.
ERCs and porting
On face value, portability and the ability to make over-payments are big positives.
While porting your mortgage may help you avoid ERCs, there’s no guarantee the deal will still be the best one for you, especially if you’re borrowing more for your new home.
There are also concerns over equity growth. When your mortgage deal ends, you can usually remortgage based on the home’s new value, taking into account both the capital you’ve paid off and any growth in equity. This can lead you to getting a better rate at a lower LTV.
With the Virgin deals, you’ll instead be stuck with the same rate for 15 years, with the fact you can make overpayments of up to 10% meagre consolation.
Who should get one?
Virgin is offering these deals right across the board but, as we mentioned earlier, they might not be best suited for first-time buyers getting on to the ladder.
Instead, they could provide an option for people moving into their ‘forever’ home, especially if they’re remortgaging or buying at a lower LTV level, where Virgin’s rates are more competitive.
Alternatively, these deals could prove useful for borrowers with 15 years left on their current mortgage, as they’ll provide a guaranteed rate for the whole of the remaining term.
Will more lenders offer long-term fixes?
Virgin’s move could result in more banks launching longer-term deals, so it might be worth keeping an eye on developments in this market.
Right now, there are considerably more fixed-rate mortgages than a year ago across all types of deal, as shown below.
Most interestingly, the number of five-year fixes has now reached nearly 2,400. This means we could be seeing competitiveness peak on five-year terms, so lenders may start to compete elsewhere if they can’t make a big enough profit.
|Introductory term||August 2018||August 2019||Change|
Source: Moneyfacts. August 2019. Fixed-rate mortgages only.