End of 5 year fixed rate advice

Tumbles

Our mortgage is reaching the end of it's five year fixed rate and at the weekend we got a letter from the bank (Santander) to say that our payment will be reduced from £515 to £340 a month. I think we will be on a tracker mortgage.

Just after a bit of advice really because although the reduced payments are great, we don't know whether it is best to shop around for another fixed deal or stay on the current rate and save the extra cash. We need various things done around the house so the extra would come in handy however by being on a fixed term mortgage gives us the peace of mind that the same amount of money will be coming out of our account each month if the interest rates were to rise. My fiance suggested we get a loan so that we can do bits to the house and use the extra money saved from the mortgage to pay that or get another fixed rate mortgage but then borrow more. Also if the payments are reduced, would it mean that it would take us longer to pay off the mortgage? (Was originally taken out for £35 years) We are a bit loathe to go to the bank for their advice and just want an impartial view on the situation.

Really don't know what to do for the best so any advice/opinions would be appreciated.

kurlakid

By your monthly payments, my guess is that your interest rate has dropped by atleast 2%ish. Current Santander SVR is 4.25%.
If you could tell us the rate you are moved and your earlier fixed rate then that would be better.

There are decent Base Tracker mortgages at 2.99% for 75% LTV. A fixed 5 year from Santander as an example is 5.25%.
So if you took a tracker today at 3% and consider even 1% hike every year reaching 7% in next 5 years then the avearge rate would be (3+4+5+6+7)/5 = 5%.
So yuo are stil 0.25% better off. That is £1250 for a £100,000 over 5 years. Is that substantial for you or is that not much for you. If it substantial then go with tracker. If that not much then stay with fix. Now it could happen that the rates won't hike 1% per year and may just go up by 3% iin next 5 years. If that happens then you will save (based on 4% avg rate over next 5 years) £6250. On the other hand if the rates hike by 8% in 5 years then by average 7% you will loose out £6250 compared to 5.25% 5 yr fixed rate on offer today.

Even if the rates go higher they will not do so abruptly in next 2 years. so you should look at reducing your loan balance in next 2 years so if the rates hike up after 2 years, your total interest will be more manageable. Hence saving now for next 2 yrs to overpay makes more sense than safety when the rates are so low at present. Move to fix after 2-3 years.

I would move to a 2/3 years tracker with the bank that has low fees or even a lifetime tracker with no restrictions (Like HSBC's) where you can switch to Fix at anytime without any penalties.

Sam.