3yr vs 5 yr fix...

homehunter

Having trouble picking between these: ultimately, no one knows what the rates will look like in 3 or 5 years time so it is coming to the point of sticking a pin or flipping a coin!! Maybe MSE peeps have some thoughts on this? We're FTBs trying to choose between...

• 5 yr fixed, 5.69%, Natwest, £799 fee plus valuation, 80%LTV
• 3 yr fixed, 5.65%, Post Ofice, £599 fee plus valuation (plus lending fee??but looks like that isn't paid by us?? don't understand that bit...), 80% LTV.

Need to decide by tomorrow eve so please, feel free to give us some ideas and thoughts...:o

Cannon_Fodder

5-yr, definitely. For the sake of 0.04% and £200 fee...

BoE recent report suggests base rate at 4% in 2012, which could mean fixed rates around 6%+...and for how long...?

And they are probably being optimistic.

opinions4u

Given that choice, I'd go for 5 years.

Are there any reasons that you think 3 years may be better for you?

homehunter

Truthfully, I feel almost like flipping a coin...

Pros of 5 years:
Know what we are paying for 5 years, and that we can afford it
Don't have to pay further fees to remortgage in that time
Cons:
Could get a better rate after 3 years, but who knows???
Locked in regardless of what happens with rates

Pros of 3 years:
Option to remortgage sooner and take advantage of any better deals...if they even exist??
Slightly less in fees, but that isn't really an issue for us, would rather get best mortgage deal for us
Cons:
Hassle and costs of remortgaging sooner
Cold be worse rates at that time - again, who knows ??? :rolleyes:

We are wondering how to factor in things like trying for a baby - scares me to death right now (loving my freedom ) but in 3 years time, it might be right for us (will be 33/31 respectively). How should this affect our decision if at all??

Either way, I got to make a decision by this evening, I can't be thinking about it any more

RufusA

A few additional points / thoughts to consider with your pin.

House prices in 3 years time are likely to be different to they are now. If there is a protacted recession, with high unemployment (and a good number of repossessions) it it possible they could be 10% or more lower than they are now.

If you are borderline 80% LTV, in three years time you could be looking at remortgaging with a 90%+ LTV and struggling to find a competitive mortgage. Obviously the converse may be possible with a better LTV and a wealth of mortgage options.

What are the Early Repayment Charges with each mortgage? A five year mortgage with reducing ERCs may mean that in year 4 or 5, it may only cost a 1% or 2 to buy your way out and choose a cheaper product. which may not be too onerous. If interest rates rocket then you can sit secure in the knowledge that you've got a peachy product!

There are lots of other factors. Flexibility to overpay, underpay, take payment holidays (none of which may be guaranteed), switch to interest only without penalty for a short period etc. The lender's liklihood to look favourably on your circumstances if you hit hard times. What happens at the end of the fixed period - how competitive is the product it reverts to.

Ultimately there is no right answer. Whatever you choose with hind sight there would be a better product out there which would have saved you money if only you had chosen it. I for example would have been on an Base rate + 0.49% life time tracker right now if I hadn't been so keen to save myself £200 in fees by chosing a discounted SVR product instead.

As for the possibility of starting a family you need to think about how you are going to fund it, and what impact it may have on your income and expenditure. If you have savings, a house big enough and income sufficient to cover the fixed mortgage - great. If you are likely to be looking for a larger place, ERCs to pay (or a remortgage due to high SVR when fixed product ends) and struggling with affordability / income multiples whilst on maternity leave, not so good!

Round and round it goes, where it stops nobody knows!

HTH - Rufus

homehunter

Thanks for this gang, all very useful. Of course, further falls in house prices affecting LTV...yet something else to factor in...personally not fussed as we are going for a house we can grow into and not looking to sell within certainly 5 years, but I can see how that might affect our remortgage. Ability to overpay is useful too, to own more of the house. Currently we are looking at paying about 22.5-23% in our deposit (I know, so frustrating to not quite have the golden 25%, but there you go! We've only got what we have thanks to a Bank of Mum and Dad loan at a very low rate - I never wanted to borrow but we've been house hunting for ages and this was the one we wanted.)

I keep swinging more towards to 5 yr fix but I'm not sure OH is convinced yet...

benjo

I honestly cannot see that lending rates will be better in three years time than they are now, fixed rates have already started to rise. I got 4.49% fixed for 5 years in April of this year, the cheapest my lender gives now is 5.59%. The post office were offering 3.99% fixed for 5 years, now they offer 4.99% - I cant imagine what would happen to the interest rates in order to bring down fixed rate borrowing to previous levels.

It is possible that fixed rates will be better in 3 years time than they will be in 5 years time - but like you say, who knows.

Ultimately the decision has to make sense to you but here was my rationale for choosing a 5 year fix vs a 3 year fix....

Im 99.99% certain that rates will be higher in both 3 and 5 years from now - so fixing while rates are historically low made sense to me.

I like to know what I am paying - if I could have fixed at an affordable rate for 10 years I would have done - the longer the fix the longer I get peace of mind (that might not be important for you - but it is for me).

The difference in rates between 3 year and 5 year fix were minimal when considering additional costs associated with fixing again at shorter intervals.

A 5 year fix allows me 2 extra years to make overpayments before my rate almost certainly rises, this has the benefit of giving me a better LTV when the product expires than it would have been on a 3 year fix. Overpayments are 100% affordable for a 5 year period vs overpayments are 100% affordable for a 3 year period - who knows after that.

I hate the hassle of dealing with the whole mortgage process (thankyou to all the great IFA's, especially mine, who take most of the pain away) the longer I can avoid it - the better.

Hope this helps.

homehunter

OK, here are the ERC's for the 5 yr fix:
Early repayment charge
5% until 31/10/2010
4% until 31/10/2011
3% until 31/10/2012
2% until 31/10/2013
1% until 31/10/2014

So, assume I'm dumb here - does that sound good? e.g. if we wanted to get out after 4 years, it wouldn't be so bad, especially if we've made overpayments? (Overpayment of 10% a year allowed without penalty.)

trynsave

What about considering RBS? They have max LTV 80% @ 5.69% fxd until 31/10/14.

£299 arrangement fee, £140 valuation, £30 tt fe and £225 exit fee.

Repayment basis only, 10% overpayment p.a. & daily interest.

Only a suggestion mind. Personally I'd go with a 5yr fix for security and peace of mind. They too have a value esp if babies are on the horizon!

Good luck with your decision. Just bear in mind that you can only go with what info is available at the time the decision is made. Hindsight is a wonderful thing and rarely wrong.

benjo

homehunter wrote: »

OK, here are the ERC's for the 5 yr fix:
Early repayment charge
5% until 31/10/2010
4% until 31/10/2011
3% until 31/10/2012
2% until 31/10/2013
1% until 31/10/2014

So, assume I'm dumb here - does that sound good? e.g. if we wanted to get out after 4 years, it wouldn't be so bad, especially if we've made overpayments? (Overpayment of 10% a year allowed without penalty.)

That really depends on how much you are borrowing, 5% of £100 or £1,000,000.

homehunter

benjo wrote: »

That really depends on how much you are borrowing, 5% of £100 or £1,000,000.

£131500 - so potentially the ERC could be £1315 - £6575...
I think I'm getting the hang of this :0)

Starting to swing back towards the 5 yr fix, whatever happens this is all such useful advice - thank goodness for all you wonderful people on MSE forums :T