3 or 5 year fix?

ollyfarrow

We are about to get our first mortgage.

Have decided not to go with a tracker as the BOE rate can only go one way and we don't want to get used to a cushy rate and then get a nasty shock in 18 months time.

So we can either go for a 3yr fix at 4.39% or a 5 year fix at 4.80%. The difference between the rates might seem small, but I've worked it out and if I went for the 3yr I'd actually be saving quite a lot of money. I'm just worried about interest rates in 3 years. Are they more likely to be settled after 5?

Any ideas or input would be great.

SelbyJay_2

Who can tell really? I've just read an article about trackers which made me change my mind about them.

Like you, i would prefer the security of the fixed rate but the article mentioned a number of lenders doing pretty good tracker rates with little or no early repayment charges.

If you can get off the tracker in a year or two (or whenever interest rates start going up again) and switch to a fix, maybe the tracker arent such a bad option.

Soot2006

I ended up going for a 5 yr fix (4.69%). I worked in the cost of arrangement fee + the "cost" to me of status quo versus stress of remortgaging ... Who knows what will happen in 5 years; I'm happy to know that not much will change in my outgoings!

dimbo61

Its not so much about how much you will save its about how much you will owe at the end of 3/5 years and what the rates are then!
If you took the 5 year deal and overpaid by say 10% each year you could be almost mortgage free in 5 years.
fees for mortgages have jumped up alot in the last 1/2 years who is to say you wont have to pay £2/3k in fees in 3 years!

emmalita

I am buying my first house and have opted for a 5 year fix.I would rather pay a bit extra for the security. Im going to over pay as much as I can during the 5 yr fix so hopefully the amount after this period will be massively reduced.

Cannon_Fodder

For 3 years you save a fair bit, but for the last 2 you might not. Re-mortgaging then could be a lot more than 0.41% difference.

Don't forget to factor in the extra fee you will have to pay...

I expect rates to be up quite substantially, but thats only my opinion.

The_Eye_Of_Sauron

Interest rates ain't going to rise by more than 2% (at most) in the next 2 years, that's a given.

The time to fix a mortgage rate will be circa Feb 2011, before the solids hit the fan, and we're well clear of the next general election. Neither Cameron nor Brown will raise interest rates, until after the election, in the same way that neither will raise income tax, even though we all know (as with interest rates) that the only way is up.

Baby.

The only way is up.

Rates will rise painfully when the gaping hole that is our current government's borrowing and it's printing of money binge hits home.

The IMF has warned us, and they have no particular axe to grind.

That is to say, when inflation (which is the inevitable consequence of printing money, or QE- quantitative easing- as they like to dress it up) kicks in, and the Govt has to jack up interest rates to prevent a run on the pound.

So, ride out on a tracker for now, but in surfing parlance- make damn sure that you jump when the wave turns into the breaker.

HTH

RufusA

A minor correction, in theory the Government don't set the interest rates. If inflation goes above the set target, and there isn't a recessionary risk the BoE will raise interest rates, election or no election.

Whether the QE will cause the economy to gently recover, or whether we'll have a huge surplus money supply and hefty inflation is anyone's guess.

Back to the OP. A couple of other points to consider:

1) What's your LTV like? If house prices were to drop another 20% in the next 3 years, would you have sufficient equity to get another mortgage deal?
2) How likely are you to want to / need to move over the next 3-5 years. A downside of a long fixed with high ERCs is your options are more limited if you want to move house!

FWIW having had years of switching between discounted tracker products, I've decided to fix for 5 years. At the time due a poor previous mortgage choice I was stuck on a 5% SVR. Fixing at 4.25% was pretty much a no brainer for me! It might not be the cheapest option now, BUT I'm pretty confident that I won't regret it in 4 years time.

HTH - Rufus.

Gorgeous_George

The whole point of fixing is to have the security of knowing that your rate won't rise over the course of the fixed period.

If you only want to fix for 3 years then you need to be confident that you can cope with the expected interest rates in years 4 and 5 onwards. In year 1 (and possibly 2) it is unlikely that rates will rise much anyway so you are really only buying security for year 3.

I'd be looking for a 10 year fix if I was a FTBer.

GG

Gorgeous_George

dimbo61 wrote: »

...
If you took the 5 year deal and overpaid by say 10% each year you could be almost mortgage free in 5 years.

:rotfl:

A £100K loan at 4.8% would cost £573 per month. Pay an extra 10% per month and you knock nearly 4 years off a 25 year term. Hardly almost mortgage-free.

Or are you suggesting the OP makes overpayments of £10K (10% of the mortgage) per year?

GG

ultramagnetic_commuter

Currently looking to move and I'm going for a 5 year fix. 2/3 year rates are very attractive but (in my opionion) there's a reason for that - lenders think that in 3 years all rates will be higher so we'll be forced to more expensive products.

It's all down to your attitude to risk and ability to potentially have increased monthly payments in 3 years. For me I'd rather catch a rate around 5% now and then not worry for 5 years.