Which fixed rate mortgage? 5-year (4.99%) or 7-year (5.39%) - You decide!

andrewmp

5 Year Fix at 4.99% - this should be long enough to weather the storm

What did you do then?

steve237

I did the 7-year fix at 5.39% and start paying my new rate in September.

Feeling happy that I am protected against rate rises until September 2016 and glad I signed up when I did as there are no 7 year rates on 80% LTV at 5.39% anymore.

However, it is becoming clear that base rate is going to stay very low for a good while, so I probably won't reap the rewards for a few years!

But having said that, my SVR is 4.24% which I would refer to next month if I hadn't have signed up - so it's not a big jump.

Gorgeous_George

I estimate that you owe £127,500.

Having taken the 7 year deal, you will be about £700 worse off in 5 years time and will have paid £3,600 more for the privelege. So that means that rates in years 6 and 7 need to be much higher to eat up the £4,300 you could have saved by taking the 5 year fix.

GG

* based on a 25 year mortgage

steve237

Gorgeous_George wrote: »

I estimate that you owe £127,500.

Having taken the 7 year deal, you will be about £700 worse off in 5 years time and will have paid £3,600 more for the privelege. So that means that rates in years 6 and 7 need to be much higher to eat up the £4,300 you could have saved by taking the 5 year fix.

GG

* based on a 25 year mortgage

I actually owe £129,000 and have 19 years left on my mortgage.

I have just used the Mortgage Calculator excel sheet posted on this forum and inputted the details of the 5 year and 7 year deal for comparison.

It tells me that at the end of 5 years, the difference in total cost of the mortgage will be £1705 (worse off in my case, paying the extra 0.40% each month)

It also states the total capital on my mortgage at the 5 year mark would be £764 more than if I had taken the 4.99% deal. I suppose I should add this to the total sum I'd need to claw back in years 6 and 7 in order to make the 7 year fix make me better off in the long run?

If so, I think that would amount to £2469. This amount divided by 24 months (the remaining 2 years of the 7 year fix) = £102. So am I right in thinking that typical SVR's on mortgage rates would need to be around 6.79% in Summer 2014 to make my deal worthwhile?

I hope that makes sense and I have worked that out right.

Gorgeous_George

I was close then.

I worked this out independently of your results and got pretty much the same result.

You have chosen a more expensive product paying £28 per month extra (in return for security in years 6 and 7). This extra payment will cost £1,705 over 5 years. Add on the £764 that you will owe after 5 years (over and above the cheaper deal) and the total is £2,469.

I make it that the breakeven point is achieved if rates are 6.83% in years 6 and 7. If they are higher, your chosen deal is best.

GG

* Ignored opportunity value of investing your £28 each month.
** Any errors are due to rounding (I used £2,469 / 24 = £103)

steve237

It might be worth mentioning; I borrowed £6822 of capital off my mum to pay of a 5% chunk of my mortgage (bringing it down to the stated £129k). This was required to get the rates to 4.99/5.39%

As a result, I will be paying interest only for the first 2 years whilst I pay back my mum her loan (plus the interest she was getting in an ISA)

Does this change things in terms of the above calculations and target sums?

Also, I think I am correct in saying that the 6.83% is not what the base rate would need to reach, but what a typical SVR or short term fixed rate might be available at the 5 year mark. If so, I think I have made the right decision.

Gorgeous_George

The £6,822 makes no difference as it would have been required for either option. With ISA rates around 3% it should be a cheap loan but your mum should pay tax on any interest that she receives from you

I agree with your last paragraph regarding the short term fix. I'd have taken the 5 year fix but you have 7 years of knowing what your payments will be. In the end, the differences are small and we won't know which deal was best until 2016.



GG

steve237

Gorgeous_George wrote: »

I agree with your last paragraph regarding the short term fix. I'd have taken the 5 year fix but you have 7 years of knowing what your payments will be. In the end, the differences are small and we won't know which deal was best until 2016.



GG

Interesting you say that George! I quote from a private message from you, dated 2nd June 2009:

"I think house prices will fall further (after the current spring bounce ends). probably 10% by this time next year. Securing a 5 or 7 year fix now would seem to make sense nefore your LTV worsens. I'd prefer the 7 year fix despite the slightly higher rate beause rates will rise sharply when inflation kicks in. A likely change of Government will not help to keep rates down so I fear there is only one way for them to go"

Amazing how one's opinions change!

Gorgeous_George

Based on your LTV I would choose the 7 year deal. With my LTV, I 'd have chosen the 5 years deal.



GG