To Fix or Not to Fix

Nickij

We have currently be sitting on a variable rate for the passed year 3.94% with HSBC.

This was because they could not offer us a fix rate when our previous expired due to out LTV.

Now they have offered us a fixed rate at 90% LTV for 6.79% for 5 years. With a booking fee of £599

Our current repayment is £1154 and the new payment if we switch to the fix would be £1538. So an increase of nearly £400.

Now I have a dilemma. I hate not knowing what our repayment might be in a years time. We are thinking about trying for another baby in around a years time and I am worried that if rates shoot up we might struggle to meet the mortgage payments when I am on maternity leave (and once I return to work - as we then have more nursery fees to pay).

However the base rate would have to rise to 3.35% before our payments on the VR would be the same as on the FR, and will this happen in the next couple of years (I know know one has a crystal ball and can tell me etc etc).

If the base rate rises slowly then I would be better of making the overpayments of £400 on the mortgage each month and then hoping a better fixed comes up in the future.

Now I know no can tell me what is best for us to do, but I just wanted to get some opinions of would other people would do if they were in our situation.

Thanks

dimbo61

Just a guess but if you have 22 years left on the mortgage and paying £1154 now you must owe about £204K ?
Thats a big mortgage and you already have one child with another planned.
Even OP by £400 a month will only clear £5K every 12 months if rates stay the same.
Long term fix gives you security while kids are little and you are off work/ working part time.
Can you get a better rate eleswhere ( try a broker )
I am in a 5 year fix myself but its at a lower rate than you have been offered ( bigger deposit/ better LTV)
Your decision GOOD LUCK

madeupname1

I had the same dilemma as you. The price of certainty for you could be as much as £24,599. That figure is made up of £400 x 12 months x 5 years (the length of the fixed rate) plus £599 arrangement fee. Of course that is the maximum and assumes interest rates wont rise in the intervening 5 years (which I accept is highly unlikely, but it just helps to play with figures). The other potential variable is that in a couple of years, lending criteria my have eased slightly so that more 90% mortgages become available at more competitive rates or house prices may have risen (thereby improving the LTV anyway). They could of course also fall.

I chose not to fix in but instead to make the overpayments with a view to reducing my LTV to a better rate. Personally I hated the idea of paying an additional £400 of interest as the price of certainty. I did not see it as good value for money. I am overpaying as much as possible and each time I make a payment the overall amount owed, and the monthly payable, is reduced (thereby allowing me to make more overpayments). By making these overpayments (and with a little help from a slightly improved housing market in my area) I am on course to reduce my LTV to 75%, putting me in a much more competitive market interest rate wise.

Nickij

The main reason why I am hesitating about it is because £400 is a big jump up, and I feel I could be reducing my mortgage by a fair bit if I made this an overpayment.

My remaining mortgage is £225k with 26 years remaining. A big mortgage yes, but because of where we live prices are fairly high and we wanted to buy somewhere that we wished to stay for the long term and be able to raise a family.

If the increase was only £200 or even £250 I would leap at the fixed rate. However I know interest rates dropped from 5% to 0.5% in the matter of about 6 months and could easily rise just as quickly.

I am wondering as well with the increase in inflation that was announced if the rates might be increased soon.

I am swinging towards the fix i think, as anything could happen in the next 5 years, and I do like the security.


To be honest before the credit crunch and recession I expected to be paying 5-6 % anyway, so its not really that much more, I am just considering that this is an opportunity to make fairly large overpayments we never may be able to do again.

I have contacted a broker to see if they can find me a better rate, but to be honest I am a little nervous about moving lenders. Our property only just meets the 90% LTV and I a bit worried if the valuation would come in lower than we expect. Where as if I stay with HSBC there is no valuation required.

dimbo61

You have the offer from HSBC as the back up plan so let the broker see what he can find and dont pay too much for the valuation and add the fees onto the mortgage ( dont pay up front in case the valuation is too low).
Still think 5 year fix or longer ! gives you security while kids young and not at school.
Just had a look on moneysupermarket and most of the 5 year fixed rate deals are 6.69% or higher

madeupname1

Nickij wrote: »

I am swinging towards the fix i think, as anything could happen in the next 5 years, and I do like the security.

Sounds like these are key considerations for you in which case fixed sounds like its right At the end of the day, I think that when you are talking about a family home, the only thing that matters is being able to service the debt on a monthly basis. As long as you do that, it doesn't really matter if you are paying slightly over the odds on a fixed.:)

stueyhants

imo, rates are going nowhere for the next 6 months and then they will only rise slowly allowing you the chance to change on to a long term fix. The UK finances are in a mess and the only thing stopping a reccession (or even depression) right now is the low IR. The BoE will risk short term inflation to keep rates low to support the economy.

This is my personal view and I've just got a lifetime tracker BoE + 1.99 versus a fix at around 5% so saving around £500 a month which I will use to overpay in the short term.

Castleman

dimbo61 wrote: »

Still think 5 year fix or longer ! gives you security while kids young and not at school.

I don't get your point here. A fix gives you security whatever age your children are.

dimbo61

Simple childcare !
Once at school mum can go back to work part time if not full time.
Childcare costs for two kids under school age sometimes makes it not worth working.

JJWW

My simple and humble opinion would be be to fix. Greece, Spain and a lot of our European partners are going to the financial wall and I would certainly not want you and your family to go the same way.

My own experience over the last 30 years has been that our economy goes through turmoil and change. John Boulger comments on the state of the market but we pay fees and the like that (don't forget) impact on the interest rates we pay.

I made a decision long ago to fix my mortgage for 20 years with the Cheshire and with my partners house as well at 3.9 and 4.9 respectively. At the time this was good and over the long term it will be. Remember we borrow money and it will cost. There is no free lunch but there may be a good deal - please look beyond the dhort term.

Also, why not look at the FSA tables (please goggle) - I'm so depressed about the level of financial literacy in this country - but there again, I agree with Nick!

Take Care - it's not going to be nice out there

J