The Thoughts of a confused Man - to fix, to track, 2 years, 5 years, 10 years.....

CrazyHorseB

I like many I’m in the position of needing to remortgage after my current deal is coming to an end but am thoroughly confused about which direction to go, I have £180k left on my mortgage (house worth around £450k) and I’m prepared to take this to around 18 years (£1100-1200ish per month) but want the option of paying more off each month (around £300 extra for now). So here are my thoughts (if only for the benefit of getting it clear in my head).

The banks and building societies aren’t giving a lot away, with some generally poor deals and large arrangement fees – the banks simply cannot afford to risk giving out ‘bad’ mortgages and are not prepared to gamble on interest rates to get the edge over competitors. Interest rates are currently very low, but the banks aren’t reflecting this in their rates with the best tracker offerings of around 2.5% above BoE rates (you could get 1.0% above 3 years ago!).

Interest rates will rise, the question is when. Some economists thoughts I have read say; when the economy gets back on track, inflation will rise quickly therefore interest rates will have to rise very quickly and quite high to curb this. So when will this happen? General opinion says not in 2009 but maybe towards to bank end of 2010.... some say longer. In reality there seemed little point in taking interest rates down to 0.5% - surely 1.5% was as low as they needed to go in terms of stimulating consumers thoughts of personal wealth. Therefore they could probably raise rates by a percent over the next year without affecting the economy too negatively. But 1% on the current tracker deals is quite a lot – taking the best to 4%. Another economist thought was that; with national borrowing so high, confidence so low and income tax up, the BoE would risk sending us back into recession if they raised rates too high too quickly, therefore will keep them low for a long time.

I wouldn’t be prepared to track for longer than 2 years, so gambling on interest rates staying below 1.5% for this period is an option, but the arrangement fees are high at the moment and it’s hard to justify spending £500 now and then another £500-1000 in 2 years time. So should I fix? The short term deals are 3-3.5% (plus arrangement fees, which are slightly higher than trackers) which seems ok, but as mentioned above the general feeling is interest rates aren’t going to change much over the next 2 years, and if they do suddenly go up in 18 months time the chances of getting a good deal in 2 years time are slim! So fix for 5 years... or even 10 years. The best deals are now around 4.5% for 5 years (yes I’m aware I’ve missed the boat on the sub 4% deals) or 5% for 10 years. Fixing for 5 years seems like the happy medium – let the current turmoil settle down and pay an ok and affordable rate for this period and see what happens in 5 years. But what If interest rates are 10% in 5 years time? Ten years sounds like a long time to fix but it could well pay off if interest rates are 10% in 5 years time, but when I look at the figures I’d be paying £4k more over the next years than a 5 year fixed, if interest rates stay low for 5 years then I’ve lost £4k.

Three years ago interest rates were 4.5% and my current deal was 2% below the banks variable rate of 7.8% = 1.2% above bank of England rates. So the question is not only what will interest rates be in 2 and 5 years time, but how competitive will the banks be?- this takes about 1% off interest rates.

So when will interest rates go up? How high will they go? For how long? How competitive will banks be....someone must have these answers!

Here a few calculations I’ve done assuming 180k borrowing over 18 years and for the 10 year calculations I will get the same deal and arrangement fees as the first deal:

Cost over 2 yrs, Cost over 5 yrs, Cost over 10 years

2 yr Tracker: .......26.5k ........................- ...............................-
2 yr fixed: .............27k .......................67k
5 yr fixed: ............29.5k .....................73k .........................145k
10 yr fixed: ..........31.5k ...................76.5k .......................153k

If interest rates are 5% and 8% in 5 years time and banks are competitive again, then the cost over the last 5 years compared to a 10 year deal will be:

Cost over last 5 yrs (5%), Ttl cost over 10 yrs, Cost over last 5 yrs (8%), Total cost over 10 yrs

5 yr fixed: ..............82k .................................155k ...........................102k .................................175k
10 yr fixed: ..........76.5k ...............................153k ............................76.5k ...............................153k

Thanks for reading my uneducated ramblings...

Edit: Tables don't paste very well into the forum so apologies if the tables are hard to read.

foreversummer

Well you've summed up the conundrum pretty well. Unfortunately, no one has the definitive answer!!

Foreversummer

RufusA

I was faced with exactly the same conumdrum.

I did some random number crunching - feeding in figures from various deals from various providers, with various scenarios as to what interest rates might do.

In the end for me I found the penalty of fixing for 5 years wasn't that great compared with most of the currently available BoE+2.5% type deals. Particularly if interest rates rise!

10 years for me is too long to be tied to one mortgage. A LOT can change in 10 years, it's not just interest rates, but personal circumstances etc.

I think the days of readily available cheap mortgages has gone for a good while. I personally don't expect there to be heaps of cheap deals in the next 2 years, and I suspect fixed rate deals will be more expensive. The Government hasn't got bundles of money to throw in to easing credit and there will be plenty of mortgage companies struggling if house prices fall much further - just look at the Moody ratings!

So for me, I fixed for 5 years, at a spit above 4%, but with a mortgage provider that won't revert to a punitive SVR at the end of the period.

Using the FSA website and sorting by APR is a good indication of the good deals after the fixed period.

YMMV - Rufus.

Hillfly

Whilst I do appreciate everyone wants to get the best deal - it seems to me that many people now always want the best deal available on the whole market regardless of risk.

My personal feeling is if you can afford to risk getting the best deal now at the risk of future rate rises then do so.
However if you cannot then take fix at rate that you can afford and with terms that suit you (like overpayments in this case) and be content you have the 'best deal for you'.

The one factor people often miss from these calculations is a risk weighting. The banks will be weighting the deals they offer with risk - so consumers should also do the same. All those on super tracker deals took a risk which is currently working in their favour. However it could all have been so different. If the credit crunch had not occurred rates would have been rising to cool the overheated housing market and those people would have been paying a lot higher.

In your risk calculation you should also consider the risk of fixing for too longer a period as well as too short as the long term deals have long penalties. What happens if someone falls ill or you need to move or even sell up as unforeseen events change you life......
I guess I'm stating the bloomin obvious - but then sometime people overlook these points in favour of the basic numbers.

CrazyHorseB

Thanks for your comments..

As a slight aside, I spoke to a small local mortgage provide who have a great rate but have closed it to new applicants - the reason being they have hit there mortgage targets for this. Perhaps this explains why a few others have withdrawn or increased there rates.