Fixed Rate Mortgage: 2 years or 5 years?

Deisler

Hi All,

My wife and I have decided to go for a fixed rate mortgage with Halifax.

Question is: should we fix 2 years (2.79%) or 5 years (3.19%)?

My understanding is: By fixing 2 years we will have an opportunity to re-fix the rate after 2 years (which if we are lucky enough the rate will stay low)

By fixing 5 years, we will have secured monthly repayment within the next 5 years, but we may face a very high rate afterwards if the economy is recovering well after 5 years time?

Any suggestions please? The rates are very close (2.79% v.s. 3.19%). 2years or 5 years: Which should we choose?

Thanks
D

JimmyTheWig

What fees are payable on each product?

If, in two years time, rates have gone up considerably, would you be able to afford to pay, say, 4.79%?

What's the SVR that you revert to after the deal? If house prices fall in the next two years and you find yourself with a too high LTV to remortgage, could you afford the SVR? Could you afford the SVR if rates went up by, say, 2%?

What term are you taking the mortgage on? Are you planning to make overpayments?
Obviously the issues that I've raised could also apply to the end of a 5 year fix but the amount you owe after 5 years is considerably less than the amuont you owe after 2 years (particularly true with a shorter term and/or making overpayments) and so less likely to be an issue.

Personally I would go for the 5 year fix, but I like to play things like that safe.

Deisler

JimmyTheWig wrote: »

What fees are payable on each product?

If, in two years time, rates have gone up considerably, would you be able to afford to pay, say, 4.79%?

What's the SVR that you revert to after the deal? If house prices fall in the next two years and you find yourself with a too high LTV to remortgage, could you afford the SVR? Could you afford the SVR if rates went up by, say, 2%?

What term are you taking the mortgage on? Are you planning to make overpayments?
Obviously the issues that I've raised could also apply to the end of a 5 year fix but the amount you owe after 5 years is considerably less than the amuont you owe after 2 years (particularly true with a shorter term and/or making overpayments) and so less likely to be an issue.

Personally I would go for the 5 year fix, but I like to play things like that safe.

Both rates have no product fee, 20 years in total.
SVR after fixed term will be 3.99% (based on current number)
We have left quite a lot space for our repayment/after-tax income ratio (<30% based on my current wage) so we will make overpayment. We should be able to afford rate increase within reasonable range.

If I understand you correctly, are you saying that 2yrs fixed will bring us with more uncertainty? and 5 yrs fixed will be much safer although it is more expensive than 2yrs fixed, provided that the rate won't increase?

John424

Well that's the burning question when you're asking for a crystal ball! I had the same dilemma with Halifax but I have slightly less equity than you, your LTV is <60%, mine is 75%. I fixed for two years as a) I felt I could get down to 60% with overpayments in time for the next refix and b) The economy isn't going to need interest rate hikes very soon imho for what it's worth, so I expect more of the same in 2 years.

Two things you haven't mentioned are the possibility of other lenders, Halifax is not so competitive and whether you might want to move soon, I can't comment on how portable Halifax mortgages are but you wouldn't want a 5 year fix when your lifestyle faces changes I guess.

John

Deisler

John424 wrote: »

Well that's the burning question when you're asking for a crystal ball! I had the same dilemma with Halifax but I have slightly less equity than you, your LTV is <60%, mine is 75%. I fixed for two years as a) I felt I could get down to 60% with overpayments in time for the next refix and b) The economy isn't going to need interest rate hikes very soon imho for what it's worth, so I expect more of the same in 2 years.

Two things you haven't mentioned are the possibility of other lenders, Halifax is not so competitive and whether you might want to move soon, I can't comment on how portable Halifax mortgages are but you wouldn't want a 5 year fix when your lifestyle faces changes I guess.

John

Thanks for your reply, John.

Halifax is currently offering cash coverage for stamp duty tax so it is around 2000 save. That is why we decided to borrow from Halifax.

For the early repayment charge, if I sell my house within 5 years and still get mortgage from Halifax when buying new house elsewhere, that will not be counted as ECR, right? So I assume there will be no penalty if I do not leave Halifax even though I sell and buy new house within fixed term.

Yorkie1

Deisler wrote: »

For the early repayment charge, if I sell my house within 5 years and still get mortgage from Halifax when buying new house elsewhere, that will not be counted as ECR, right? So I assume there will be no penalty if I do not leave Halifax even though I sell and buy new house within fixed term.

That will depend on the particular T&Cs of your contract.

You may be able to apply to port your existing rate across, which is unlikely to incur an ERC but if you do not wish to port it across (additional lending would be at a different rate), or do not meet the criteria for Halifax's lending at that time, then an ERC may well be payable.

Dave_Ham

Some really good points to consider, failing the crystal ball it is worth considering the 2 year fix (get the mortgage down) and then a longer fix in 18-20 months

The Stamp Duty offer is a winner from Halifax and going down very well. Even taking into consideration your Stamp Duty cashback, Halifax are not best priced over a 2 or 5 year period so you may want to re-look and calculate the total cost over the fixed term.

Just a thought - good luck

JimmyTheWig

Deisler wrote: »

If I understand you correctly, are you saying that 2yrs fixed will bring us with more uncertainty? and 5 yrs fixed will be much safer although it is more expensive than 2yrs fixed, provided that the rate won't increase?

Yes, that's exactly what I'm saying. With a 5 year fix you know what you will be paying for the next 5 years.
The chances are that in 5 years time house prices will have gone up, your outstanding mortgage will have gone down and your salary will have gone up. Which means an increase in mortgage rate then won't hit so hard as it would in two years time.
But, yes, you are paying a premium for that safety net.

We should be able to afford rate increase within reasonable range.

Sounds like you don't need that safety net, though, so is it worth paying that premium for?


I think it just comes down to a question for you to answer yourself - do you think that mortgage interest rates will go up by more than 0.5% in the next two years?
If so, get the 5 year fix. If not, go for the two year.


[Obviously what other people are saying about looking at alternative providers might be more relevant than looking at which is better out of these two deals.]

Deisler

Dave_Ham wrote: »

Some really good points to consider, failing the crystal ball it is worth considering the 2 year fix (get the mortgage down) and then a longer fix in 18-20 months

The Stamp Duty offer is a winner from Halifax and going down very well. Even taking into consideration your Stamp Duty cashback, Halifax are not best priced over a 2 or 5 year period so you may want to re-look and calculate the total cost over the fixed term.

Just a thought - good luck

You are right. But my wife and I are not UK resident (by passport) at this moment and that really limit us to Halifax/RBS/TSB now.

Among them, Halifax has the highest rate (0.1~0.2% more) however with the ~2000 cash back that really stands itself out because the difference in rate will have very little impact, not to mention that you never know if Halifax will have the highest rate all the time in the next 20 yeas....

I guess now we are more likely to go for a 5 years deal with Halifax. Thanks for all the replies, guys.

Regards
D

jayroc2k

On the subject of rate, most banking professionally are of the opinion rates will remain flat for some time to come.

Now whether banks pass on the low rates to consumers depends on many factors not restricted to rates

The spread between the two rates is so thin I would fix for 5 years


here is a crude example
2yr + 3yr deal
Loan Amt 100,000.00
Monthly pmt 467.43
annual pmt 5,609.16
fees 500.00
initial total term 11,718.32
remortgage fee 1,000.00
remortgage over 3yrs 17,827.48
total over 5yrs 29,545.80



5yr deal
Loan Amt 100,000.00
Monthly pmt 488.75
annual pmt 5,865.00
fees 500.00
initial total term 29,825.00
remortgage fee -
remortgage over 3yrs -
total over 5yrs 29,825.00

Cost of insurance 279.20 (think of this as the cost to fix the rate)


Personally it depends on your LTV. if its 60% or less i would for float for about 2% and remortgage later or get a HSBC life time tracker