How long to fix?

Scott1313 · 13 January 2018 at 3:45PM

Hi guys

I'm a first time buyer and am looking into mortgages. I have never had any debt or any sort of bad credit. Currently I have cash assets totalling £68,000 and my salary is currently £19,000. I just got a new job 2.5 months ago and am due a pay raise within the next 3 months to £22,000.

I'm looking at houses up to £140,000 as banks are offfering me £80,000-£90,000 mortgages.

My question is about how long to fix a mortgage? I was initially looking at fixing for 10 years at a rate of 2.4% (TSB cleared me for this) given that interest rates may rise and I want to be sure about what I am paying. Others have suggested taking a lower rate 5 year fixed and then negotiating a better deal after 5 years given that I will owe less money and would be in a better position.

I appreciate there is no one best solution but I was wondering what people thought, with interest rates predicted to rise should I be fixing for as long as possible?

Thanks!
Scott

Thrugelmir · 13 January 2018 at 4:13PM

Scott1313 wrote: »

then negotiating a better deal after 5 years given that I will owe less money and would be in a better position.

There's no negotiation involved. You apply for what's on offer. In 10 years time difficult to see you bettering a rate better than 2.4%. Given interest rates are only heading one way. Albeit slowly.

There's nothing wrong with fixing into a long term rate. If it suit you and your circumstances. Knowing what your outgoings are going to be. Is a sure way of not having to worry.

Scott1313 · 13 January 2018 at 5:20PM

That's a good pont, "negotiate" was really the wrong word there. What I was getting at though was if I fixed for 5 years at a lower rate, then after 5 got another 5 year one at a lower rate, would that be a better strategy?

I had thought 10 was best but just interested to hear the pros/cons of each. I do plan on seeing a mortgage adviser next week as well.

Thanks for the reply!

sevenhills · 13 January 2018 at 5:35PM

Scott1313 wrote: »

That's a good pont, "negotiate" was really the wrong word there. What I was getting at though was if I fixed for 5 years at a lower rate, then after 5 got another 5 year one at a lower rate, would that be a better strategy?

I had thought 10 was best but just interested to hear the pros/cons of each. I do plan on seeing a mortgage adviser next week as well.

Thanks for the reply!

Each time you get a mortgage, there are likely to be costs involved; the mortgage fee and a fee for a financial advisor etc.

But if you are young, personal circumstances often change (children/divorce etc), so a 10 year mortgage may lock you in, with more fees to exit.

Aspiration · 14 January 2018 at 11:24AM

I have always gone with 2 year mortgages until the last house we purchased four years ago.

Cons
Locked in usually with high early termination fee (3% still today and there's less then a year to go)
Flexibility to get a better rate if house price does increase (either renovations or capital growth)
Stops you accessing your equity if you need it or would like to redeploy your money elsewhere.
Usually limited to only making overpayments of 10% so if your personal circumstances did change then you can't usually clear it quickly.
As described personal situations can change alot over 10 years.

Benefits
Certainty on what you're paying over the next 10 years and you can predict how much you will have left.
No additional fees created throughout

Overall, I wish I hadn't fixed for five years. The house is worth more (building work as well as market increase) which has meant we're paying probably£350 more per month now then I would be if we been able to remortgage. (Which is what we signed up for so no complaints).

Good luck deciding, it's always a hard one. Oh.. well done for building such a significant amount of cash assets, that can't have been easy!

getmore4less · 14 January 2018 at 12:39PM

Do the numbers for a 10y V 2x5y then you what rate you need to get in 5y to break even against a 10y.

Removes one of the guesses.

As your LTV will be relatively low the change in 5y won't be as good on interest rate reduction as someone starting out at 90%

Scott1313 · 14 January 2018 at 2:52PM

getmore4less wrote: »

Do the numbers for a 10y V 2x5y then you what rate you need to get in 5y to break even against a 10y.

Removes one of the guesses.

As your LTV will be relatively low the change in 5y won't be as good on interest rate reduction as someone starting out at 90%

That is a good point. Since my LTV will already be <60% your are probably right. I'll do the numbers as you suggest and see where I am at.

Thanks for the help

AnotherJoe · 14 January 2018 at 3:07PM

There are many posters regretting being in very long fixes because their circumstances have changed and they have to pay a whacking big amount to get out of. For an FTB the odds are high that within 10 years time they will change.

ScottOfficial · 14 January 2018 at 3:43PM

Rates are only really heading one way and a 10 year fix at 2.4% doesn’t sound too bad. I have personally only ever gone for 2 year deals but this has mainly been during a rising market with rates generally heading in a downward trend. Any deals coming to an end now I am fixing for a long as possible. You need to also take in to account that with a 10 year deal you will not have to pay new arrangement, booking, valuation or sometimes legal fees associated with refixing or switching lenders. Yes the rate may be slightly higher now but you will know where you stand for 10 years and not have the hassle of refixing every 2/5 years.

The benefit to 2 year deals is that you are able to refinance without the worry of ERCs every 2 years. This has benefitted me in a rising market as I have been able to release equity to invest elsewhere. If this is just a residential purchase then I’d focus on getting it paid off, use any extra savings over the next 10 years to pay off chuncks of the mortgage (most lenders allow 10% a year with charging ERCs).

The market at the moment seems fairly level and although it will most likely slowly rise over the next few years it will probably not jump as dramatically as we have seen since 2009/10.

Obviously circumstances can change however most horror stories are from people fixing into long term products back when rates were high. Obviously now they want out to get onto better deals and are facing ERCs. Most resisdential mortgages are portable so you will be able to move it onto a different property if you decide to move and most lenders will even give you permission to let it should that be the best option for you. You would need to check all of this in the lenders T&Cs but the way I see it is unless you suddenly decide you no longer want to own a property you cannot really lose out.

Hope this helps.

Scott1313 · 14 January 2018 at 4:17PM

I'll need to ask but I am not really clear on what penalties there are for moving if things change. If I move house I see there is a fee but I can't see where I would incur a massive cost by being in a 10 year fixed mortgage and then moving.

As I understand it the mortgage is on me and not the property, thus buying a new property shouldn't alter the terms unless it costs significantly more money which get included on the property? Have I got that wrong, all I can see listed in the T&C's is a £50 cost incurred when moving house? I think the ERC is only triggered if the new house is significantly cheaper and I would be, in effect, "overpaying" by moving somewhere cheaper.

ScottOfficial · 14 January 2018 at 11:35PM

Correct, you will not pay the ERC if you port onto a new property but maintain the same loan amount. If you are buying a cheaper home you will pay an ERC on the amount you repay. For example if your load at the time is £150k but you move onto a property where a loan of only £100k is needed you will pay the ERC on the £50k, if you can afford to then the sensible thing to do would be to pay off the 10% overpayment first then paying the ERC on the rest. On a 10 year fixed deal this is likely to be high towards the start of the mortgage and generally will decrease the longer you keep the property.

Most lenders will also allow you to increase the loan amount without paying the ERC if you are buying a more expensive home. Just bear in mind that you will probably need to be approved again for the increased loan amount with TSB. Also bear in mind that their criteria may change over time.

If you are using a high street lender like TSB then the likelihood is that they will stay competitive with criteria and so if you are earning more then they will probably lend you as much as the competition in years to come.

How long to fix?

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