Choosing between 2/3 year fixed rates

FTB_Newbie_2

So as a First Time Buyer I'd like to fix the rate of my mortgage so I can be sure how much I'm paying each month, but for how long should I fix?

Comparing the current Nationwide products the 2 year fix is at 4.65% and the 3 year at 4.98%. If I went for the 2 year fix I'd save around £300 over the 2 years compared the the 3 years fix.

The question that bugs me is this: are rates likely to be that much higher in two years time so that I'd rapidly loose the £300 (which in the grand scheme of things isn't really much).

Having just changed job I wouldn't expect my salary to rapidly increase in the next two years, although by then I would have paid off my student loans freeing around £130 a month.

Any thoughts appreciated

Cantona_2

I went for the three year fix, because I believe that interest rates will go up soon, but didn't want to be tied in for too long.

Also, if I went for a two year fix, and wanted to get another fixed rate at the end of the two years, I'd be paying another mortgage reservation fee.

polarbearit

Personnally (and I'm no expert) I'd go for a 3 year fix as

1 Most people seem to think rates are on the rise, but this hasn't happened quickly!
2 There is a fee to pay for the fix so the fee over split over 3 years is lower than split over 2 years

And I'd reserve it ASAP as lenders seem to be increasing their rates at the moment as the next rate change is expected to be upwards

MortgageMamma

why don't you look for a mortgage on a competitive rate with no reservation fee and then compare to the options you already have. have you taken independent financial advice on your mortgage? if not you could instruct a whole of market advisor to draw up a comparison for you.

MM

AndrewSmith

Hi,

You need to compare both 2 and 3 years on a true cost basis to determine which is cheapest overall.

This will take into account things such as a trade off of potentially lower rate of a 2 year against the need to switch product a year earlier than with a 3 year that may have a slightly higher pay rate attached.

When you look at some direct comparisons it can actually work out that overall it may be better to take the lower rate for a shorter time and pay to switch a year earlier, but on other cases the longer term slightly higher initial rate can work out cheapest overall.

Look very carefully at both options. You may even want to consider enlisting professional help to carry out a cost comparison analysis for you.

Andy

tonydee

I'm considering a 5 year fixed rate with Nationwide at 5.08%. Piece of mind, no more fees for 5 years and I also believe the rates will be higher than 5% within 2 to 3 years if not sooner.

MortgageMamma

nobody can predict what rates will do in 2-3 years time. But for the record, the mortgage you are considering is OK but not THE most competitive as far as 5 year fixed rates go. Have you taken advice?

tonydee

MortgageMamma wrote:

nobody can predict what rates will do in 2-3 years time. But for the record, the mortgage you are considering is OK but not THE most competitive as far as 5 year fixed rates go. Have you taken advice?

Not to hijack the thread but yes have had some advice and will be phoning L&C before committing to any deal. As for predictions well anyone can predict what they believe will happen, what actually happens is another thing. IMO and I'm no expert the only way is up.

FTB_Newbie_2

AndrewSmith wrote:

Hi,

You need to compare both 2 and 3 years on a true cost basis to determine which is cheapest overall.

This will take into account things such as a trade off of potentially lower rate of a 2 year against the need to switch product a year earlier than with a 3 year that may have a slightly higher pay rate attached.

When you look at some direct comparisons it can actually work out that overall it may be better to take the lower rate for a shorter time and pay to switch a year earlier, but on other cases the longer term slightly higher initial rate can work out cheapest overall.

Look very carefully at both options. You may even want to consider enlisting professional help to carry out a cost comparison analysis for you.

Andy

Hi Andy,

Obtaining a true cost comparison is absolutely what I'm after, but to do this meaningfully I need someone to make a prediction as to what interest rates are going to be in two years time. The mortgage brokers I've spoken to so far haven't - what they seem to do is ask how long you are thinking of fixing for and work from there.

What I want to do is ask the reverse question: given my predicted earnings profile/change in spare cash over the next couple of years, how long would it be prudent to fix for?

FTB_Newbie_2

polarbearit wrote:

And I'd reserve it ASAP as lenders seem to be increasing their rates at the moment as the next rate change is expected to be upwards

Very true. Apparently the Nationwide are upping their fixed rates on Wednesday.

Is it possible to reserve a product even though I haven't had an offer accepted yet? If so, do I get a decision in principle on the maximum I can afford, and then ask the mortgage company to reduce the advance if I find somewhere cheaper?

AndrewSmith

FTB_Newbie wrote:

Hi Andy,

Obtaining a true cost comparison is absolutely what I'm after, but to do this meaningfully I need someone to make a prediction as to what interest rates are going to be in two years time. The mortgage brokers I've spoken to so far haven't - what they seem to do is ask how long you are thinking of fixing for and work from there.

What I want to do is ask the reverse question: given my predicted earnings profile/change in spare cash over the next couple of years, how long would it be prudent to fix for?

Yes, if only life were as simple

The reason that I, and any other good broker will not make a prediction of what rates are likely to do is that, put simply, we don't know for sure. No one really does.

The problem is that the press can make such predictions as by the time the 2 years has come an gone no-one will remember what they said.

If a qualified adviser was daft enough to hazzard a guess as to what interest rates are going to be in 2-3 years time, on which your advice and product selection is subsequently based, the ramifications could be severe for the broker if he predicted incorrectly, and you took umbridge (especially if it were documented that such a prediction was made).

The fact is that different mortgage products will suit different people. It depends on whether you want stability with your payments, or are the type of person that will take a risk on a shorter term product and hope for favourable rates when it ends.

That, I'm afraid, is a decision only you can make.

As for how long you should fix for? That question can be answered by simply doing a direct comparison of the true cost of both a 2 year and 3 year fixed rate over the respective term. That does bring us back to the problem you raise initially of what will the rate be at the end. All we can do is base it on today's rates as we have nothing else to go by.

It also depends on what your intentions with the property are as well, and how you see your life/situation changing over the next 2-3 years. Again, things that no-one knows for sure but only you can truly answer.

Hope this helps

Andy