/ 2 or 5 yr fixed mortgage deal? Other risks?

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elliot.baker - on 13 Apr 2019

I need to renew my mortgage deal shortly (for the first time) and I assumed I would go for a 2 year deal, but having done a bit of research I think a 5 year fixed deal seems less risky.

My thinking is that every source I've read says interest rates are likely to go up at least once if not twice this year and that Brexit is likely to result in the cost of borrowing increasing.

Now for me a 5 year deal would cost about £16 more a month than a two year deal, if interest rates went up by 0.25% in two years, that would cost £19 a month (on a new two year deal in two years time) so I would already be quids in. If rates went up by 1.25% then it would cost £100 more a month which is obviously where the real risk lies! I presume this is unlikely to happen in two years, but could it happen in 3 / 4 years?

If rates go the other way I could save £19 a month at a 0.25% drop or almost double that if they dropped .5%, but from what I've read people don't seem to think this is going to happen.

If we decide to move within 5 years (which is highly likely) then we can port the mortgage and add more on, I guess there is risk there if the lender doesn't think I'm credit worthy enough of the extra mortgage - but then most lenders would probably think that I imagine, so it's not like I'd be better off if I could go elsewhere.

I know it's  a 5 to 1% early repayment charge in years 1-5 respectively, but I can't imagine any scenario in which I would need to do that - am I missing something?

Am I missing something here? To me a 5 year deal seems like a no brainer for the small sum of £16 a month extra to have 5 years of certainty?

1
Deadeye - on 13 Apr 2019
In reply to elliot.baker:

From what you describe that sounds sensible.

Rates remain very low in historical terms so there's really not much leeway for reductions more than .25%, although it's possible that a desperation cut might be required in the event of a no deal brexit.

I'd look at the £16/month as insurance and, like insurance, hope it doesn't come into play!

1
tjdodd - on 13 Apr 2019
In reply to elliot.baker:

I think it is mainly about what gives you overall peace of mind.  If you earn enough and have enough disposable income to not worry about interest rate fluctuations then you can take the risk either way. I am sure there are ways of arguing it both ways in this case.

However, being able to budget clearly for the next 5 years without any worries as you know exactly what you will be paying will give a lot of peace of mind.  In this case you almost should not think about what future scenarios may arise.  It is just about knowing exactly what you will pay.  In this case forget what potentially may happen and ignore it when interest rate changes happen.  Just know you know where you are.

Hope that makes sense.

JayK - on 13 Apr 2019
In reply to elliot.baker:

Also depends on your LTV. Anything above 75% won't get you the best rate (so you could potentially benefit from taking a 2 year fix and remortgaging with a lower LTV after you've paid some off and the property value (hopefully) has increased). Although, I'm assuming if you're remortgaging, you'll probably be lower than that and already getting market leading rates. 

It would be easier if you stated the rates for each of the mortgage lengths although I understand why you wouldn't on a public forum.

Post edited at 11:09
Jenny C on 13 Apr 2019
In reply to elliot.baker:

When we first bought mortgage rates of 10% from the 1990s were still fresh in everyones mind and we have always fixed. Yes we've probably lost out more than we've won, but it gives peace of mind which it priceless if you are on a tight budget and can't afford unexpected increases.

I would probably go for the 5 year deal, £16 isn't a lot and the tears are hardly going to go down. 

Jamie Wakeham - on 13 Apr 2019

I've just fixed for ten years - with a low enough LTV the Coventry are offering 2.29% (was 2.25% when I booked it so clearly rates are already starting to creep up).  If you are as pessimistic as I am about the future, it's a no-brainer.

Wanderer100 - on 13 Apr 2019
In reply to Jamie Wakeham:

2.29% fixed for 10 years is an amazing deal. If my current 5 year fixed term was due for renewal now I would go for it but have to wait until next year or pay for early settlement.

kirsten on 13 Apr 2019
In reply to Jamie Wakeham:

First direct also pretty close to this for 10 years ... just done it myself.... 

wintertree - on 13 Apr 2019
In reply to elliot.baker:

I’d fix for 5 years.  If rates go down, I would be happy that the versions of me in all the alternate timelines where the rates went up are protected from the rise, and that I’m loosing almost nothing compared to the new lower rates.

How much would rates have to fall to save the rearrangement fees in 2 years time if you changed?  They literally can’t fall very much.

neilh - on 13 Apr 2019
In reply to elliot.baker:

Can you find a deal which fixes rate and allow you to over pay?

Those sort always seemed the best value to me

Philip on 13 Apr 2019
In reply to elliot.baker:

I had to make the same decision a month ago.

I went for 5yr. Like you rates similar. I don't owe enough to benefit from paying a fee and getting a cheaper rate nor will my LTV change enough for any benefit, and so in 2 yr there is unlikely to be a better offer.

What was good was staying with Santander they let me switch 5 months before my actual end date, saving me £1300.

bouldery bits - on 13 Apr 2019
In reply to elliot.baker:

Are the fees the same? This is important to consider.

Are you going to move house I'm the next 5 years?ERCs can be painful I'm the event of a move and the mortgage not being portable for some reason.

Just things to consider,

BB

bouldery bits - on 13 Apr 2019
In reply to neilh:

> Can you find a deal which fixes rate and allow you to over pay?

> Those sort always seemed the best value to me

Almost all deals let you overpay by 10% per annum without incurring ERC's. There are some notable exceptions but 10% is normal.

Dave the Rave on 13 Apr 2019
In reply to elliot.baker:

A no brainier given the climate. Take the 5yr and forget about the €16. 

mullermn - on 13 Apr 2019
In reply to elliot.baker:

Having done my first remortgage last year here’s a couple of tips:

1) don’t underestimate how long the end to end process takes - I had some vague idea that it was probably basically like switching bank account with some slightly heavier weight forms but it isn’t - get started early!

2) partly related to 1) and on the subject of fix length - remortgaging is an utter ballache! For the sake of the small difference in costs I’d go for the longer fix simply to avoid having to do it again any sooner than necessary. Also, if there are any fees involved (either explicit or hidden in some other charge) don’t forget to account for the fact that you’re going to pay them or something similar twice to cover the same period.  

Edit: if you’re self employed or have some other reason to have an amount of savings around that you can’t tie up long term (so, you can’t just put it in to paying off your mortgage directly, for example) don’t forget to consider offset mortgages. With savings interest rates what they are I am currently making a killing by offsetting my mortgage against money that would otherwise be making virtually nothing in interest. 

Post edited at 22:04
Fozzy on 14 Apr 2019
In reply to mullermn:

I’ll be doing this for the first time later this year (current fixed period ends in December). 

What sort of timescale did you encounter? Are we talking a few weeks or months? 

Also, can anybody advise on the sort of costs involved in arranging a new mortgage? 

mullermn - on 14 Apr 2019
In reply to Fozzy:

Having looked at my emails, I was contacted by the broker who arranged the first mortgage on 4/7 with an invitation to kick the remortgage process off.  We then had a discussion to find candidate deals and complete the prequalification process that lasted until 1/8,  and we then had the arrangement of the specific deal we went for running up until a completion on 13/09. 

This was a remortgage for a mortgage with a fix period that expired on 31/07, so you can see we missed the target by quite a bit.. it’s lucky interest rates have been low anyway!

I am self employed and as a result I use a broker rather than taking a deal off the peg (a lot of lenders are not very welcoming to people without a normal salaried income), which may not help matters. 

The main learning point for me was that arranging the mortgage accounts for about 60% of the work to buy the house in the first place. I had assumed it was much simpler. 


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