Help choosing mortgage product

Quirky6000

Ok, we're in the process of buying a new build due to be build complete in september time. We have spoken to our mortgage company and have an agreement in principle which lasts for 3 months, then after applying, the mortgage offer will be valid for 16 weeks, so hopefully there shouldn't be any problems having to re-apply for the mortgage.

Right, now we have 2 choices, we're borrowing £153k and we've been offered 2 years fixed at 5.49% or 5 years fixed at 6.49%. So which would you go for? My argument is for the 5 years obviously giving us longer while the interest rates will probably going up. My wifes argument is for the 2 years, as she thinks that if interest increases then so will property prices, meaning when we remortgage in 2 years our LTV will be less, meaning a lower rate anyway?

Any advice apppreciated?

Exocet

Quirky6000 wrote: »

My wifes argument is for the 2 years, as she thinks that if interest increases then so will property prices, meaning when we remortgage in 2 years our LTV will be less, meaning a lower rate anyway?

I can't fault that logic. Quids in.

Quirky6000

But will a rise in interest of say, 3-4% would that make a huge difference to prices and LTV? If we go from 85% LTV to 82%, we'll still be classed as 85% for remortgage purposes?

Quirky6000

Anyone else have any advice? 2 years or 5 years?

<sebb>

What is the LTV on the amount you are borrowing now?

Quirky6000

once we've moved we'll be borrowing 85%

kentishdoris

Have you looked at the early redemption fees?

How likely are you to want to move in the next 5 years?

Quirky6000

We almost certainly won't be moving in the next 5 years, I'm just thinking about the money saved on the lower interest rate and if this outweighs the risk of rate shooting up in 2 years??

<sebb>

They dont look like the best rates for 85% LTV.

A quick search showed a 5 year fixed from Yorkshire Building Society for 5.69%.

Working out the payments, the 2 year fixed deal would be £926. 5 year fixed deal would be £1,014, so you'd save £88 a month on the two year fixed. However, you'd be likely to have to remortgage after two years which might cost up to £1k depending on the deal you want. So over 2 years, you'd save a little over £2k but spend another £1k on remortgage fees so still a saving.

However, you have no guarantee what mortgage rates will be like in two years time, so you dont know what rate you'll get on a remortgage. I could be better, but equally it could be worse.

Another thing to think about is how much you can afford the interest rates to go up before your mortgage will become difficult to afford. If it's not a great deal, then you might want to consider a longer fixed period for peace of mind.

My wifes argument is for the 2 years, as she thinks that if interest increases then so will property prices, meaning when we remortgage in 2 years our LTV will be less, meaning a lower rate anyway?

Your wife's arguement doesnt necessarily follow. Lets say interest rates go up to 6% and mortgage deals are still around 1%-3% above base, you are looking at index linked interest rates of 7% - 9%.

You may well have fallen in to the 80% LTV band by then, but you'll still be paying at least 7% which is higher than your current rates.

Quirky6000

Well the payments for the rates we've been offered are £920 for the 5 years or £800 for the 2 years.

I've been looking at other mortgages fixed over 2 years and seen products under 4% but with almost £4k in setting up fees, so there's not much difference there.

I like the idea of 5 years peace of mind but I'd hate to get 2 years in to find out rates haven't changed much and we've just thrown money down the pan!

<sebb>

My calculations were on a 25 year repayment, is yours a longer term?

Quirky6000 wrote: »

I like the idea of 5 years peace of mind but I'd hate to get 2 years in to find out rates haven't changed much and we've just thrown money down the pan!

That's the gamble you have to take I'm afraid. No one can predict what mortgage rates will be like in the future. You have to decide which is more important to you. The peace of mind, or the possibility of losing money.

The mortgage markets have changed dramtically in the last couple of years. A couple of years ago when base rates where ~5% it was possible to get fixed rates of 6% on a deposit of 5%. Base rate is now 0.5% and you'll struggle to even get a mortgage with a 5% deposit at all let alone at 1% above base fixed for 5 years.

Trackers were available at 0.5% above base, now you're looking at 1.5% above even with 40% deposit, and 2-3% plus for smaller deposits.

Who knows where the market will be in the future.