2 year vs 5 year fix

Lee777

So, I'm having a (friendly) argument with my Dad about my potential mortgage strategy. I'm not asking for financial advice here, just wondering if anyone can chip in on whether my strategy makes general sense.

Assumption:

We're both working on an assumption that the base rate will begin to rise in about 2 years from now. We both fully realise that this is unknown, it could happen sooner, later, at an unknown rate, etc, etc.

Facts:

1) I'm looking at buying a first house for £135k

2) I have a small deposit at 10%

3) We're comparing a 2 year fix at 3.59% vs a 5 year fix at
4.39%.

Dad's advice: Go for the 5 year fix over the 2 year fix because you're protected against the interest rate rises for longer (at a price of paying a bit more per month).

My strategy: Go for a 2 year fix now, then just as rates start to rise in 2 years, I take advantage of decreased LTV % from combination of paying off some of the mortgage balance and house price increases and then re-mortgage with a longer fix while interests rates have either not changed or barely shifted upwards. I know this has a lot of factors going into it but here goes...

Assuming the house stays same value I calculate LTV will go from 90% to 86.6% from 2 years payments alone (this does account for mostly paying interest in that time). This almost unlocks 85% LTV deals.

Combine this with potential 10% rise in value of the house over 2 years this gives 78.8% LTV. Then, just as the base rate starts to curve upward, I then try to lock in on a good 5 year 80% LTV deal...

Any good, or am I misunderstanding how re-mortgaging works?

Moby_Tide

Could backfire for obvious reasons but your rationale has been quoted by quite a few sources on various blogs and money websites recently and has some decent logic behind it. The obvious downsides are if rates rise quickly in your 2 year fix period or if you are unable to remortgage for other reasons in 2 years and are stuck on an SVR.

Different circumstances but I am thinking a 2 year tracker and then switching to a fix in 18-24 months myself rather than fixing for 5 years now

GMS

You can't compare a 2 year fix to a 5.

What will be the SVR?

If you go for the 2 year fix ignore all other rates of today. Don't assume you WILL be able to remortgage to a similar rate as today as the market could well be a different place then. If the cheapest rate available then was 6% (for arguments sake) then not choosing the 5 year fix would look foolish.

Consider fees to remortgage after 2 years too. Are they worth paying?

dimbo61

If you use whatsthecost you can see how much you will have paid off in 2 and 5 years !
Can you afford to overpay every month ? Many fixed rate deals still allow 10% over payments.
Where will you be in five years !
Job, kids, income, size of property, long term plans etc need to be considered.
I would be interested to see the LTV in 5 years perhaps 75% ?

nidO

We're currently remortgaging at the moment and are looking for a 5 year fix, in my mind that's the more sensible option. What you're proposing is theoretically sound but is basically a potentially awfully expensive gamble vs a fairly safe bet.

Remember that just because interest rates are predicted to rise somewhere in a horribly vague ballpark of 2 years doesn't mean that fixed rate deals are going to be cheap for that long - The interest rates of 5 year fixes have already risen slightly in the past few months following signs of recovery and a base rate rise in 1-3 years, and that trend is presumably going to continue.

The long and short of it is that you can pretty much guarantee any 5-year fix in 2 years time is likely to be noticeably more expensive than it is today, its really just a question of whether you want to take a massive gamble.

Yorkie1

Your assumption that the property will rise 10% in value in 2 years is highly optimistic unless you're in the London bubble (which I doubt if the house is valued at £135K).

_gav_

There is also the assumation that interest rates will rise and continue to do so. Looking at all the media reports, the prediction is that rates will creep up very very slowly. We could be many years away before interest rates are back up to 5% levels.

2 year fixes seem to offer little protection to me, rates aren't going to move in 2 years, .25/0.5 max, I can't see any more than that, can you? If you want a safety net, then 5 year fix is the way to go I would guess. But it's your call, your circumstances that drive your decision.

Alter_ego

I'm one of the savers providing your mortgage. I'm fixing my savings account rate for just 2 years as I figure you're going to pay me more in a couple of years

Thrugelmir

Interest rates could rise without any change in base rate. Lenders obtain their funding from a variety of sources. The cost of money will may well determine future rates. Mortgage rates are currently depressed due to the post financial crash support measures. These will progressively have less and less impact.

DepositSaver

I have an AIP for a 2 year fix and have just had an offer accepted on a flat and am having the same dilemma. The offer is for a fair bit less than my AIP was for, so 4 or 5 year fix with higher interest rates is now affordable, whereas it wasn't on a higher purchase cost.

I don't have any plans to move jobs, home or city, but I can't guarantee that I won't. I'm single with no children, but can't guarantee that I will still be in that position in 5 years. I guess I need to look at early repayment charges and weigh up how likely a change in circumstances within 5 years is...