Mortage advice - 2 year or 5 year fixed deals

bargain_hunter25

Hi

I would like a few opinions on what you would do regarding mortgages in the present market. Here is our situation.

We are looking at our first house for £146,000 and we can put 15% deposit down on this. We qualify for a few deals at the moment. We are questioning whether to go for a 2year fixed rate deal such as the C&G Direct Purchase (85 - 3.99%) or the Lloyds TSB Purchase (85-90 - 3.99%) which works out about £670 a month for a captial & interest payment based on a 25 year deal.

On the other hand, we are also debating whether it would be wise to fix on a 5 year deal to get a bit more security. However, as you will know, these deals when you only have a 10-15% deposit are really poor in terms of interest (6% or above) and a repayment would be in the region of £830 per month based on a 25 year deal. Initially, to us the top option with the lower payment is the obvious choice as after those two years if interest rates are still low (maybe not as low as now) then we could just "hang around" on the banks SVR deal until the right time to fix comes along as we would be able to save up sigificanty over the next few years and with a 15% deposit, granted house prices dont crash we would have some equity to get a good re-mortgage deal. However, this is all dependant on bank rates and we ceratinly dont know whats going to happen with them in 2 by two years from now! If interest did remain relatively low after 2 years, but we had fixed at 6%+ for 5 years we would be kicking ourselves for not going on the 2year fixed deal!

Then again, there are also trackers, but then thats too risky, right?

Thanks in advance for your time, we don't really have any experience with mortages and are just starting to learn.

worriedindebt

i dont think anyone would stick their neck out and advise you what to take, no-one really knows what rates will do in the future.
the real questions are for you and you alone to answer:
1. will you want to move in 3-5 yrs? if so a 5 yr fixed will incur an early repayment charge if you dont port the mortgage
2. will you want to overpay? many fixed rate deals have limits on how much you can overpay each month (often a percentage such as 20% of monthly pmt max)
3. have you asked your broker to calculate the various financials with the various rates.. yes a rate may be lower on a particular deal but will the booking fee incurred outweigh the saving over the 2, 3 or 5yrs??

lots to think about so good luck!

Over paying a mortgage particularly when rates are this low, can have MASSIVE benefits in terms of cutting years off and saving interest.. ask your lender to show you the graphs they are very inspiring!

rincage

What about Britannia's capped mortgage. 85% LTV. Bank of England Base Rate plus 2.99%, currently 3.49% variable but which will not go above a ceiling of 6.49% before 31/07/2015. Changing then to our Standard Variable Rate.

Could be the best of both worlds (ie, low rate now, but with a cap it won't go over if and when rates rise).

bargain_hunter25

OK thanks for your advice I will take the capped mortgage into consideration. If anyone else has some more advice that would be great.

maestromiddy

we also looked at the C+G 85, but look at the ridiculous product fee - £3500+ for a typical mortgage!! Yes, you can (and they want you to) add it to the term of the mortgage but you's end up paying over £7000 in interest on this amount.

Leek UNited BS have a market leading discount variable of 2.95% at the mo. Product fee £195. No ERC. HLC applies (between £500 and £1500) but this doesn't necessarily negate the very good rate. LTV up to 90% :-)

jonny2510

This is one decision that only really you can make.

You could go for a two year deal at £670 a month, and save the extra £130 a month that you would have spend on the five year fix in a Cash ISA (that you will strictly never touch). Then over the 2 years fixed rate you will have saved £3840. Assuming the rates stick, for the three years after your two year fix is up (unlikely!) you will save £9600 over the 5 years of the fixed rate.

Should the rates be roughly the same after 2 years, you'll be a winner. Should interest rates have increased significantly* you can use the £3840 buffer that you have saved in payments to cover the increase in monthly payments. Otherwise you have an extra £3840 in savings that you didn't have before, to use as you see fit

* You'd have to calculate what sort of interest rate increases the buffer can protect you against, whilst allowing you to still afford the monthly repayments.

All this assumes that you will actually save the money, and never dip into it though!