2 or 5 year fix?

dirty_magic

Which do you think is a better option for a first time buyer with a 15% deposit? I'm not sure whether the rates are likely to go up enough to justify a 5 year fix in 2 years. Would it be better to fix for 2 years and try to remortgage after that? Is it even possible to mortgage after 2 years?

I've been looking for the best overall cost for comparison, but I'm not sure if this is the best thing to do either. If the base rate goes up 1%, would the SVR be likely to go up 1% too or is the lender likely to change to whatever they want meaning that the overall cost for comparison is useless?

Will probably go to a broker but I'd like some idea of what is a good deal beforehand.

marathonic

It depends on how stretched your budget is and your total mortgage amount.

A high level of borrowing usually means it's better to select a mortgage with higher fees but a lower interest rate. Likewise, a lower level of borrowing can mean that something with a high rate and little, or no, fees is best.

If your budget is stretched enough that you could not afford rate rises, then a longer fix is best. However, in this case, the bank would be unlikely to lend to you anyway.

Assuming you have flexibility in your budget, which will be the case if the bank actually approve a mortgage, I'd go for whatever deal is the cheapest over a 2 year term.

My reasoning for this is that, as each 2-years pass, you're likely to gain access to lower LTV mortgages - through capital paydown and potential house price rises.

It's only when I'd get to 60% LTV that I'd consider long-term fixes - at that point the best rates on the market would be available to me.

However, it's all a personal choice and you need to decide what's best for you. Rates may not rise until 2016 but, equally, they could start rising before the end of this year. Noone really knows and the conflicting economic data from week to week makes it difficult to guess.

Look at http://www.money.co.uk/mortgages/85-mortgages.htm to get some guidance as to what's out there.

dirty_magic

Our budget shouldn't be too stretched, hopefully aiming to keep repayments low to allow room for rate increases.

The Marsden are offering 2.75% fixed but their SVR is 5.95%! The West Brom are offering 2.99% but their SVR is only 3.99%. But if we could mortgage after 2 years anyway it might be worth choosing the lower rate. Most fixed deals have early repayment charges too and I'm not sure how much they would cost.

It's difficult to know what the best option is when there are so many different offers available!

Thrugelmir

dirty_magic wrote: »

If the base rate goes up 1%, would the SVR be likely to go up 1% too or is the lender likely to change to whatever they want meaning that the overall cost for comparison is useless?

Across the whole market SVR's average just under 5%. So lenders have already protected themselves against sharp sudden rate movements.

The downside of a 2 year product is the cost of switching to another product even with the same lender. Remortgaging can incur considerable other costs. Which as the balance owed reduces become more and more significant.

Sometimes the certainty of knowing your outgoings for a longer term i.e. 5 years. Gives one peace of mind.

There's no right or wrong as no one can predict the future.

marathonic

Yeah, it's very difficult and I'm coming up to having to make the same decision in 2 months time when I book my remortgage.

If the rates are very close and the lower rate has a significantly higher SVR as above, it may be worth going for the higher rate because property values can also fall and it may not be possible to move away in 2 years time. However, there's also no guarantee that the SVR's will be the same at that time.

dirty_magic

Yeah that's the problem, I think the base rate will rise next year and then let lower SVRs will probably move close to 5 anyway.

I'd like the stability of a 5 year fixed rate and to know I wouldn't have the hassle of remortgaging but then the rates are so high I think it could end up being a bad decision. A crystal ball would be very useful.

JustinR1979

I went for 5; 5 years of knowing my payments, and 5 years until the ballache of renewing.
5 years of bringing mortgage down, payrises, and improving LTV for when the rates are higher.

jellyfish76

I went through the same choice.

In the end I went for a 3 year fixed rather than 5, but calculated what I need to overpay over the next three years in order to protect myself from a interest rate hike and to improve my LTV. The rate for 3 years was considerably cheaper than the 5 so as long as I am disciplined (I am a worrier and a saver!) then I will be ok.

It also means that if I do have any money problems in the next year or so I have fairly low payments.

tvfreek

For what its worth - a number of my clients earn decent money in London and they all went for 5 year fixes.

Obviously most of them could pay the mortgage off over this period if they chose to.

dirty_magic

Unless something changes drastically I can't see us paying it off in 5 years :-) I've just looked at 3 year rates and the cheapest 5 year deal isn't much more than the cheapest 3 year deal I can find.

dimbo61

Most mortgages last 25 years with many borrowers now taking 30/35 year terms. Do you really want to remortgage 10/15 Times over the next 25/30 years ?
Use " whatsthecost " to work out how much you will have paid off over 2/5 years and what LTV you will be at in 2/5 years.
You at looking at 85% LTV now and much better deals come in at 75% LTV so do you think you can pay off 10% in 2 years.