Fixed vs variable - am I missing something?

krisn11

Hello,

I'm after some informal mortgage advice

The short version is: when looking on mortgage comparison sites, fixed rate over 5 years always seems to be cheaper than variable/other mortgages, yet carry less risk. Am I missing something?



The longer, more detailed version is below:

My partner and I are FTBs with a 25% deposit on the property that we'd like to buy with a repayment mortgage over 25 years. I've been looking at mortgages available on a few comparison websites: MoneyFacts, MoneySupermarket and MoneyAdviceService.

Sorting by the total amount payable over a 5 year period, there are some fixed rate mortgages at around 2.9% with Yorkshire, Chelsea, West Bromwich, PostOffice with APRs that vary from 4.0 to 4.8%. All cost approximately the same over a 5 year period. The rate then reverts to somewhere between 4.5 and 5.8% after the 5 year fixed term. Other fixed rate mortgages with a shorter term are all noticably more expensive in terms of the actual cost over 5 years.

Variable, tracker and discount mortgages (with a few exceptions) typically offer 3.1 - 3.7% initial rate, with relatively small increases in the rate that the mortgage reverts to after the term. The APR for these mortgages is 3.2 - 3.8%. Over a 5 year period, these all cost the same or are more expensive than the fixed mortgages.

Even factoring in additional hassle and fees if we were to remortgage after 5 years, the fixed rate mortgages still appear to be the better deal in terms of actual cost (despite the higher APR). At best, the base interest rate remains the same; at worst, it increases and the variable & tracker mortgages become significantly more expensive than the fixed rate mortgages.

My questions:
* Have I oversimplified things?
* Are there any reasons for us to go for a variable/tracker/discount mortgage, especially if it looks like it will cost more than the fixed rate mortgage + remortgaging costs?
* The "Actual cost over 5 years" displayed on MoneySupermarket appear to be ~10% higher than displayed on both MoneyFacts and MoneyAdviceService for the same/similar mortgages. Has anyone else seen this?

Thanks in advance. Any insight would be greatly appreciated.

bigadaj

You need to factor in fees an downer costs, though again over five years these will lok favourably on fiver year fixes.

The reason these look good is that you're comparing costs over five years; if you take a shorter term or variable rate even then you can remortgage, and so not necessarily have to adopt what is frequently the follow on rate. You could do a comparison over the full mortgage term which might make things clearer, though again you may well remortgage away during this term for cheaper rates, and base rates will obviously vary in this time.

There's no other point in history where you could get a fixed rate at these levels so you're getting a good deal and reducing risk of rates I creasing over that period, only problem I can. See is that they can be expensive in fees if you are borrowing a small amount.

Thrugelmir

krisn11 wrote: »

The short version is: when looking on mortgage comparison sites, fixed rate over 5 years always seems to be cheaper than variable/other mortgages, yet carry less risk. Am I missing something?

Product fees on application.

Follow on rates after the initial term has expired.

The lower the fixed rate the more targeted the product, i.e. lower LTV or a certain group of applicants.

ACG

5 years can be a long time as first time buyers - are you planning on having kids for example? If you do, will you still be happy in that property? A lot can change in 5 years so you might want to consider early repayment charges or a shorter tie in period.

But in the main 5 year fixes do seem to be pretty low rates at the minute.

dimbo61

Rates have never been this low and the BOE base rate has now been 0.5% for over 4 years.
The only way is UP but when is the question?
Now well done on saving a 25% deposit so far and this gives you pretty much the pick of the market provided you have no problems in your credit history?
You need to look at your long term plans ?
KIDS in the next 2/3/5 years?
Income, job, location, size of property are all important.
Would it be a good idea buying a one bed flat if you both want 4 kids in the next 4/5 years!!
2/3 years will soon fly past when owning a property so look ahead, what will your LTV be in 2/3 years still 75/70% or 65/60% where even better deals can be found!
I now live in our perfect house and we took out a 5 year fix for the security at the time, but only stayed in my first home for 3 years.
You can often PORT your mortgage to your next property provided you have the right LTV

krisn11

bigadaj wrote: »

You need to factor in fees an downer costs, though again over five years these will lok favourably on fiver year fixes.

The reason these look good is that you're comparing costs over five years; if you take a shorter term or variable rate even then you can remortgage, and so not necessarily have to adopt what is frequently the follow on rate. You could do a comparison over the full mortgage term which might make things clearer, though again you may well remortgage away during this term for cheaper rates, and base rates will obviously vary in this time.

There's no other point in history where you could get a fixed rate at these levels so you're getting a good deal and reducing risk of rates I creasing over that period, only problem I can. See is that they can be expensive in fees if you are borrowing a small amount.

The product costs don't seem too bad when looking over the next 5 years. Balancing the reduced risk in interest rates increasing over the next 5 years, vs the ability to remortgage during that time seems to be key, and I think we'd be prefer to fix for that period of time.

Thrugelmir wrote: »

Product fees on application.

Follow on rates after the initial term has expired.

The lower the fixed rate the more targeted the product, i.e. lower LTV or a certain group of applicants.

I suspect we will remortgage after the 5 year fixed term has expired, but will try and factor in the additional product fees against the follow on rates.

ACG wrote: »

5 years can be a long time as first time buyers - are you planning on having kids for example? If you do, will you still be happy in that property? A lot can change in 5 years so you might want to consider early repayment charges or a shorter tie in period.

But in the main 5 year fixes do seem to be pretty low rates at the minute.

We should be OK in this property for a good few years, and hope to be able to make some monthly overpayments during this time. Will certainly keep in mind future potential changes in circumstances - family, etc though.

dimbo61 wrote: »

Rates have never been this low and the BOE base rate has now been 0.5% for over 4 years.
The only way is UP but when is the question?
Now well done on saving a 25% deposit so far and this gives you pretty much the pick of the market provided you have no problems in your credit history?
You need to look at your long term plans ?
KIDS in the next 2/3/5 years?
Income, job, location, size of property are all important.
Would it be a good idea buying a one bed flat if you both want 4 kids in the next 4/5 years!!
2/3 years will soon fly past when owning a property so look ahead, what will your LTV be in 2/3 years still 75/70% or 65/60% where even better deals can be found!
I now live in our perfect house and we took out a 5 year fix for the security at the time, but only stayed in my first home for 3 years.
You can often PORT your mortgage to your next property provided you have the right LTV

I hadn't considered a shorter term and then remortgaging if we are able to reach the next LTV milestone. Off the top of my head, I doubt we will be able to make that (e.g. in 3 years) though. Will be worth considering, but a bit of a gamble as to whether any better interest rate would be wiped out by increase in base rate before then - as you say, the only way is up.


Thanks for the replies - it's given us some more to think about.