need to make a decision fast. new fixed rate or svr in lot of negative equity!

rover25

We bought our house at the peak for £178,000 in June 2007 and our fixed rate (5.14%) is just ending in the next day or two. Our house is now worth about £120,000 (if that!) Anyway rang the lender to expect to hear we can just go onto svr of 4%. However we were offered 3 options

- svr @ 4% - can overpay as much as we want
-2 yr fixed @3.99% -can only overpay until end of 2009 and then only 1000 per year for the rest of the deal time
-5 yr fixed @ 5.14% - same terms as 2 yr fixed.

We wanted to overpay as much as poss so had thought about the svr but am very wary rates rising high esp when we are in so much negative equity.
Thinking of choosing the 2 yr @ 3.99%.
Would appreciate peoples opinions

dimbo61

You have a large mortgage YES and may well be in negative equity
The 5 year fix means you will contine to pay the same amount ( or close to it !) for the next 5 years and have long term security.
How much to you expect to be able to overpay each month ?
Does the 2/5 year fix allow overpayments ? 10% a year ?
If you take the 5 year deal you have time to clear some of the mortgage and reduce your LTV.
Use "whatsthecost" to work out how much you will have cleared over the next 5 years.
If you can afford it you could also reduce the term ( BUT only if you can afford the higher payments EACH AND EVERY MONTH ) Good Luck.

rover25

I would like to repay maybe up to £700 extra per month. The 2 yr and 5 yr fix only allow over payments until the end of this year and then we can only pay £1000 extra per year!
Going on the 2 yr fix instead of the 5 yr fix,(£796.38 instead of £920 per month) we would prob save £120 per month. Is that worth it?

WestonDave

The reason for going on to fixed rates is to protect against adverse rate movements in the future - i.e. a big rise. However you have to factor into that equation that if rates for borrowing rise then it is likely that to some extent rates for savings will also rise.

Unfortunately no-one has a crystal ball in these circumstances but, my take on this is that if rates on both borrowing and saving stay low it is most likely that this will be to the end of this year, with the chances of a rise increasing after that (it may happen sooner). If rates stay low this year then that isn't a problem to you on the fixed rates because you can use the money you would be saving to pay off more mortgage. Once rates start to rise you won't be able to pay off as much mortgage but you will be able to use ISA's etc to earn interest on money you set aside for repaying at the end of the fixed term. (Even now First Direct are offering 7% for one year on a regular saving ISA!)

I would therefore given the lack of saving on SVR go for one of the fixed rates. The question then is which. If you think that in 2 years time you can significantly improve your LTV position so as to get into a more competitive rate market then it might be worth going for the shorter fix and taking a risk on the state of interest rates in 2 years time. However given that the rates you are being offered don't appear to be currently penalising you for potential negative equity and that it is going to be a very big cut to get down from potential negative equity to say 75% LTV, I would doubt whether you are very likely to find much better in 2 years time than the 5.14% you have been offered.

In your position therefore I would probably be looking seriously at the 5 year fix - settled outgoings at times when employment is still in danger is probably worth the cost for peace of mind. However there are things you haven't said like how much the mortgage is and whether there are any fees - all of these factor into the sums.

rover25

mortgage is £175,180 and the fees for the fixed rate deals are £199. House worth about 120,00 (if that). lender does not require a valuation becuase a current customer.
When you mention 7% for a ISA with First Direct what is the criteria for that?

WestonDave

The FD ISA is a regular savings account from their current account - so you can put £300 a month in (although if you have a joint current account you could have one each feeding from it). It may not be suitable as you may not want their current account but I was trying to make the point that even when savings rates are at an all time low, there are still ways of getting the income to at least partly offset the interest you are paying. However if 2 of you did this or other ISA's and put £1000 into the mortgage it would cover your £700 per month.

Fees are not that significant on that size mortgage - I was concerned they would be nearer the £1k mark. You'd only have to see a 1.2% rise in base rates to leave yourself out of pocket on the SVR versus the 5 year fix. I think a rise of more than that over 5 years is almost certain given the current 0.5% base rate. If that returned to its more normal 4%+ then you could be looking at 8% depending on how margins tighten.

I don't see any obvious reason not to go for the 5 year fix - you can use this current year while rates are low to pay off as much as you can, and then beyond that put the money into savings.

rover25

Thanks for your replies. Very helpful.
The only thing that's putting us off the 5 yr fix is that we would be able to pay off a lump sum of the total balance after 1 and half years (we would have saved money set aside if not overpaying) and as such decrease the balance and the interest on that balance sooner(?), than if we wait for the five years to pass.

rover25

Going to ring them now. Anyone any further opinions?

Phirefly

What did you decide in the end, Rover? And who is your lender?