Which of these mortgages would you choose?

ollyfarrow

Which of these would you go for if you were in my shoes?

• 2.95% Life Time Tracker at 2.45% above the BOE rate - No exit fees etc so can change whenever.

• 4.54% 5 Year Fixed Rate - Plenty of early repayment fees etc

• 5.29% 10 Year Fixed Rate - Plenty of early repayment fees etc

Basically I'm scared of going for a cheap rate tracker mortgage, in case interest rates rocket once the Conservatives (probably) get into power. I heard a financial bod say on the radio that from around 2011 our strategy for tackling the recession will have to rapidly reverse. He said that from 2011 interest rates will need to rise highly and that they probably will.

If you can be bothered to read all this, here's a little background info to help you make up your mind, it's a little bit unusual so bear with me;

My girlfriend and I don't earn a lot of money, a combined wage of roughly £38k. We both have pretty secure jobs and my wage in particular should be going up steadily over the next few years.

We are lucky enough to have a big deposit of £125k. This is our first property and we are jumping up the property ladder a few rungs higher than most first time buyers. This comes with a catch; we have to pay back the £125k deposit to the kind person who lent it to us (no interest!) within ten years. Essentially that means that we'll be in our first property for many years to come, with the end result being a remortgage to pay back the £125k deposit. It will probably be the house that we raise our children in, like I said, an unusual situation for first time buyers.

With the above in mind, we want a house that is big enough to raise a family in, basically we want as much house as we can possible afford as we won’t be able to move for a long time.

We have had a mortgage amount approved of £150k, so that means with the £125k we could technically afford a house worth £275k. But there is no way we could afford the repayments, so we are looking at buying a house in the region of £250k.

I have done a pretty extensive household budget with every conceivable expense accounted for including a small amount of spending money each month. We can afford to spend up to £700 a month on mortgage repayments, £500 would be comfortable (we would still have enough money to enjoy ourselves every now and then), but at £700 we would be living off tinned food and never going out.

At the moment, if we take out a loan worth £125k, over 30 years at 2.95% our mortgage repayments would be £528 a month.

If we take out a loan worth £125k, over 30 years at 4.54% our mortgage repayments would be £642 a month.

If we take out a loan worth £125k, over 30 years at 5.29% our mortgage repayments would be £700 a month.

So, do we risk the cheap rate tracker just so we can afford a bigger house, but worry about future interest rate rises? Or do we get a house that is a bit less expensive on a 10 year fixed rate just for the piece of mind?

RP72

ollyfarrow wrote: »

Which of these would you go for if you were in my shoes?

• 2.95% Life Time Tracker at 2.45% above the BOE rate - No exit fees etc so can change whenever.

• 4.54% 5 Year Fixed Rate - Plenty of early repayment fees etc

• 5.29% 10 Year Fixed Rate - Plenty of early repayment fees etc

Basically I'm scared of going for a cheap rate tracker mortgage, in case interest rates rocket once the Conservatives (probably) get into power. I heard a financial bod say on the radio that from around 2011 our strategy for tackling the recession will have to rapidly reverse. He said that from 2011 interest rates will need to rise highly and that they probably will.

If you can be bothered to read all this, here's a little background info to help you make up your mind, it's a little bit unusual so bear with me;

My girlfriend and I don't earn a lot of money, a combined wage of roughly £38k. We both have pretty secure jobs and my wage in particular should be going up steadily over the next few years.

We are lucky enough to have a big deposit of £125k. This is our first property and we are jumping up the property ladder a few rungs higher than most first time buyers. This comes with a catch; we have to pay back the £125k deposit to the kind person who lent it to us (no interest!) within ten years. Essentially that means that we'll be in our first property for many years to come, with the end result being a remortgage to pay back the £125k deposit. It will probably be the house that we raise our children in, like I said, an unusual situation for first time buyers.

With the above in mind, we want a house that is big enough to raise a family in, basically we want as much house as we can possible afford as we won’t be able to move for a long time.

We have had a mortgage amount approved of £150k, so that means with the £125k we could technically afford a house worth £275k. But there is no way we could afford the repayments, so we are looking at buying a house in the region of £250k.

I have done a pretty extensive household budget with every conceivable expense accounted for including a small amount of spending money each month. We can afford to spend up to £700 a month on mortgage repayments, £500 would be comfortable (we would still have enough money to enjoy ourselves every now and then), but at £700 we would be living off tinned food and never going out.

At the moment, if we take out a loan worth £125k, over 30 years at 2.95% our mortgage repayments would be £528 a month.

If we take out a loan worth £125k, over 30 years at 4.54% our mortgage repayments would be £642 a month.

If we take out a loan worth £125k, over 30 years at 5.29% our mortgage repayments would be £700 a month.

So, do we risk the cheap rate tracker just so we can afford a bigger house, but worry about future interest rate rises? Or do we get a house that is a bit less expensive on a 10 year fixed rate just for the piece of mind?

In your situation I'd personally go for the 5 or 10 year fixes basically for the peace of mind of not worrying about rate rises over the next 2 years. Get a house for 250,000 and save yourself the extra stamp duty. Also until you have kids I'd be renting the spare rooms out to either overpay or save for paying back the £125,000 in ten years.

samnorris2

I suppose it depends if you need piece of mind of the fixed rate or not. The post office have a 4.15% 5 year fixed offer but they are withdrawing on Monday 27th so if it was of interest, you'd need to act fast. I spent most of last weekend checking through 5 year fixes but only because I hope to have my mortgage paid off in about 8 years.
My advice like RP72 is to overpay as much as you can. The PO deal caps overpayments at 10% of the capital value. On the other hand - Northern Rock have a 4.69% deal with unlimited overpayments and more flexibility.
One thing you should also leverage is the 50% LTV that you will have on a £250k house. Make sure you seek out the best rates with a LTV as low as you have.

ollyfarrow

Thank you both

The PO deal looks good, pitty it runs out so soon.

socrates

With a large deposit like that - I would wait - your position is getting stronger every day.

I am confident there are better deals around the corner

Only the brave....

samnorris2

Yes, PO deal does look good, you just need the application in by Monday and the fee paid, then you get an agreement in principle and have 6 months to firm up the application. If you see something better you can walkaway but you lose the fee.
I've been pondering if I go with it but I'm swaying to the NR 4.69% with unlimited overpayments after it was highlighted to me in another discussion. Theres a bigger opportunity here for me to cut my overall term down by about a year and a half.

Good luck, whatever way you go.

MISS.R_3

I've found a 5 year fixed rate of 4.25% with Ipswich Building Society

getmore4less

You have to think like you are borrowing the £125k you are getting interest free, it needs paying back in 10y.

To remortgage you need prices to rise a lot OR have paid off a lot of your mortgage by then or have significant pay prises or a combination.

You are getting in at 100% LTV, to pay back the loan you will need equity say 15% min so that limits the remortgage.

If we take out a loan worth £125k, over 30 years at 5.29% our mortgage repayments would be £700 a month

Lets say you borrow the £125k on the 10y fix making total of £250k

http://www.whatsthecost.com/mortgage.aspx

After 10y you will have £102,555.03 outstanding

say £103k so you will need to remortgage for £228k, 91% ltv at £250k so prices need to go up to say £270k min at 4 x salary multiple you need your salaries to be close to £57k(so probably no kids for a while).

Payments over 20y are now £1500pm.

Bigger house bigger bills and council tax.

One way to overstreach buying a bgger house is to get lodgers(make the space earn), this will make the numbers much less risky, even if you do it for just a few years.

luckyfool

Or buy the cheaper house on the 10 yr Fixed Rate. if you are overstretching yourself then even more of a reason to fix for the longer term. Taking a mortgage that you can only afford while your pay rate is at 2.95%, but that you could not afford if your mortgage pay rate went up to 4.5% or 5% is financial suicide imho.