How long to fix - 2, 3 or 5 years?

dang86

Hi forumites,
We're in the process of applying for a mortgage to go hand in hand with the Help to Buy shared equity scheme. The house's value is £270k, meaning we need a mortgage of £202,500 to compliment our £13,500 deposit and £54k H2B loan.
The question now facing us is weather to fix for 2, 3 or 5 years. As we're expecting our first child in May, we're currently leaning towards the 5 year fix at an interest rate of 3.34% as it gives us greater security against rate rises over the next 5 years and means we can enjoy family life without worrying about money for the next 2/3 years.
But with the BofE predicting that rates will remain low for the next 3 years, should we take a bigger risk and go for a 2 year fix at 2.34% or even a 3 year fix at 2.64%, and hope that rates are still low when we remortgage in 2/3 years time? The real question holding us back is HOW confident can we be that rates will not rise ahead of schedule in 2/3 years time?
If for instance, the BofE unshackled rates in 18 months time and the best rate we could remortgage at in 2/3 years time was around the 5-7% mark, money would become extremely tight (though not completely unmanageable) - whereas if we were on a 5 year deal, at least we would have time to brace ourselves for such a rise and adjust our lifestyles/employment accordingly...
Any thoughts greatly appreciated!

pinkpiglit

If you’re worried about interest rate rises and you know that you can afford to pay the monthly amount required for a 5 year fix, then I’d be inclined to go down that route. I personally can’t see rates going in any direction other than up, but when that’s likely to be is anyone’s guess.

For what it’s worth, we’re in the process of selling our place and buying a new one. I’m hoping we can fix for a minimum of 3 years, ideally 5 if I can find a decent rate that won’t break the bank. But that’s our personal preference as we like to know exactly how much we have to put aside each month.

Wallhart

BOE have it wrong IMHO. I think they will go up earlier. But it's 1% cheaper for 2 year so you have to ask how quickly will they go up.

I can't see them going up quickly and even then they may use other methods of monetary. We chose 2 year. You have to ask yourself what you can afford. If you will be in a better position in 2 years or not.

This country is setting itself up for a disaster.

getmore4less

Work out where you would be if you got the lower rate and overpaid/saved

Don't forget to factor in change fees

Also look at the follow on rate when considering your options

you take a risk if you assume you will be able too get a new deal

start living on the budget as if you already had kids they are expensive.

dimbo61

Why are you paying £270K for a property ? That is over £8K in stamp duty.
Think long term in 4.5/5 years your child will be at school.
You will have paid off some of the mortgage debt. How are you paying back the 20% loan ?
How much extra per month will the 5 year deal cost compared to the 2 year deal?

pinkpiglit

Well for starters, Dang86 doesn’t say where he’s buying. It might be that he’s found a bargain in his local area, which in the longer term, is well worth £8k in stamp duty.

dimbo61

Help to buy and shared equity !!!!
New build by any chance ?

dang86

Yes, new build. £270k in the Surrey/Hants borders really doesn't buy you much house. We were shopping around the £230k-£250k mark for months to no avail, so decided to raise our budget with help from H2B. Despite the extra £5.6k hit on stamp duty (£2,500 on a £250k property compared to £8,100 on a £270k), the vastly improved interest rates using Help to Buy (3.34% on a 5yr fix with 75% LTV with H2B, £818.25 per month, compared to 4.69% on a 5yr fix with 90% LTV without H2B, £1091.46 per month) means we will effectively recover that loss within three years. Yes the government effectively owns 20% of our house, but our total investment is roughly the same, our repayments are much lower and we get to live in an amazing house which is more 'future proof' than many of the cheaper, smaller, older properties we were looking at without H2B. The only question is how much risk we should take on in terms of 2, 3 or 5 year fixes...

Yorkie1

At 3.34% you're already paying nearly 1.5% lower than my present 4 year fix. It is really a very low rate in the long-term scheme of things.

Nobody knows what interest rates will be like in 2/3 years' time, but if you take a fix of that duration don't forget to factor in the expenses if you choose to move lender at the end: survey, legals. Plus the product application fee if it's not a fee-free deal.

As for the attitude towards risk, that's something nobody on here can assess for you. What is right for one person will not be best for another.

Thrugelmir

Expect interest rates to rise when you least expect them to would be my opinion. We are living in uncertain economic times, where events from outside the UK could easily change the situation very quickly. While the BOE may not change base rate. Other factors could influence the cost of borrowing.