2 year or 5 year fixed rate mortgage?

mark432

I am a first time buyer and have had an offer accepted on a flat. I have decided I want a fixed rate mortgage, but can’t decide whether to get a 2 year or 5 year fixed rate mortgage. The mortgage is with Alliance and Leicester, and have worked out the following should be correct for my mortgage (borrowing £80,000):

2 year at 4.39% - £439 a month (no booking fee)

5 year at 5.29% - £481 a month (+ £995 booking fee)

I can comfortably afford the payments of a 5 year fixed rate and still save quite a bit of money each month. I am leaning towards the 5 year because of the security of being able to save money for the next 5 years without interest rates shooting up.

However my main concern is committing to staying in this flat for 5 years, as I may want to move. The early repayment charge is 5% for the 5 year (was 3% for the 2 year one). Alliance & Leicester have said I can transfer my mortgage if I move so long as the mortgage amount is the same or more. But I am still cautious about it in case their lending criteria changes, or if I had too get a another job with a lower salary.

I know there is no right or wrong answer, but I could do with some opinions to help me decide. Do you think it is best to go for the 2 year or 5 year fixed rate mortgage?

brit1234

5 is safer with rates likely to go up 1-2% this year alone.

Plus you have peace of mind, i would go for 10 if I could find one.

property.advert

What is the best non fix deal ?

If 3% against 5.29% then you are losing (5.29-3)*80k/12=153 a month

You have to plot your predicted interest rates month by month in Excel and see where your break even point comes. Don't forget to add in the £995 rip off fee.

For me it is a no brainer. I've just seen rates as low as 2.5% on trackers. Give the fix a miss but price in any penalties. It might be better for a nil or low exit cost loan.

speedbird1973

brit1234 wrote: »

5 is safer with rates likely to go up 1-2% this year alone.

Plus you have peace of mind, i would go for 10 if I could find one.

If interest rates go up 1 or 2 % (and i think you're being overly pessimistic as usual) then the fix is still expensive. I'd go for a fee free lifetime tracker and swap in a few years as rates will increase albeit (in my opinion) slowly

VIGILANT22

brit1234 wrote: »

5 is safer with rates likely to go up 1-2% this year alone.

Plus you have peace of mind, i would go for 10 if I could find one.

Much has to be considered when committing to 10 years.....

benood

brit1234 wrote: »

with rates likely to go up 1-2% this year alone.

Personally I think that rates will stay low for a long time yet. IMO we're where Japan was 20 years ago.

But if you are taking out a big mortgage and would struggle if rates did rise more than say 2% then perhaps a 2 year fix would be a lower risk option, as a first time buyer I was happy to accept paying more for the security of a fix whilst a few years later having a chunk of equity has made me less risk averse.

Charterhouse

I'd take a 5yr fixed, but I'd try and find a better rate. I always think that under 5% is good value. Don't worry too much about the portability (obviously you want it), in my personal opinion it is unlikely that banks are going to tighten up their criteria massively from here.

adamcarvell

im in a similar situation but not forst time buyer but re-mortgager do i fix for five years for peace of mind knowing theres no hidden costs or go for tracker option ?

adamcarvell

as i have a a&l account they are offering a five year fixed at 4.95% but with a £995 fee is that any good?

Charterhouse

adamcarvell wrote: »

as i have a a&l account they are offering a five year fixed at 4.95% but with a £995 fee is that any good?

As with any fee you need to just work out what the equivalent rate you are being charged is. So the fee is basically £200 per year of the mortgage, which on a £100,000 would be 0.20% a year. On a larger mortgage it's obviously less. Then add that to the mortgage rate and see if it still adds up.

slarty_2

I took out a mortgage recently and was initially looking to fix - I had assumed that low base rate meant there'd be good fix rated deals, but they were all around 5% whereas the trackers were considerably lower at around 3%.

I made the decision to go onto a tracker (currently 2%, tied in for 2 years) as I believe rates will stay low-ish for a while. (There's even the chance that as lenders return to profitability they may cut the high margin currently being charged between the BoE base rate and their fixed rates)

So although traditionally fixed rates are rightly considered the low risk option, there is the "risk" that you may be paying a considerably higher rate during the entire fixed period than on a tracker.

However if you like the fact that you know what your payments are going to be and you don't mind paying extra for this peace of mind, you might as well go the whole hog and get the 5 year deal.

Escpecially as you're more likely to be paying this additional "peace of mind premium" for the first 2 years than the following 3 years when interest rates should be going back to more normal levels.