choosing between 2,3 & 5 yr term

tarab1986

Hi. We are first time buyers and are working with a mortgage broker to apply for an AIP with Skipton building society.

Offer has been accepted of 250,000. We are planning to put down 50,000 deposit. Our broker has advised the following options:

1.99% 2 year fixed £738pm
2.46% 3 year fixed £786pm
2.94% 5 year fixed £836pm

The problem is that we don't know which option to go for. We are planning on staying in the house for a long time but we also would want to save as much as possible to replenish our very depleted savings.

All advice is welcome.

betmunch

Have a think about what you think interest rates will do over the given periods. If you think they will stay low take the short term fix, if you think they will rise then take the long term fix.

PixelPound

I suppose it depends on who you think will win the election and what they will do with the economy :eek:

It's why the housing market is quieter than normal

audigex

Unfortunately as Nic_c said, it's about predicting the economy and guessing how things will change in the next few years: very difficult with such an unpredictable election coming up.

Personally I prefer longer fixed terms, as I'd rather pay slightly more but know that it's not going to change dramatically during that time. That said, a lower rate will allow you to increase your savings more in the short term while still allowing you to make a dent in your mortgage.

At least at the moment we don't have to think about "What if I lose out because the rates drop?" eh?

jozxyqk

For me, anything sub-3% is amazingly low.

Are there any fees involved? And if so are they being paid for upfront?

getmore4less

Multiple factors.

What could you afford?
Income expectations
LTV improvments
Interest rate predictions.

Do some what ifs.

1. 2y @ 1.99%
2. 5y @ 2.94%
assume the fees are all the same?

£200k over 30 years paying £837pm

in 2 years you owe

1. £187638
2. £191433

after 5y on 2 you owe £177601.

your next 3y fix if you take a 2y can go as high as 3.66%(no fee) before you lose money thats 1.2% over the current 3y rate.

if you went for 2x2years fixes.

5y fix after 4 is £182348
the 2nd 2y fix can go as high as 4% thats 2% over the current 2y rate

say rates went up 1% after 2 years so the second 2y fix was at 2.99% after 4 years you would owe £178512

that final year you could go as high as 5.1% before you are better of with the 5 year fix.

THats the power of a free £100 overpayment by taking a lower rate.

lvm

I'm in the exact same position at the moment but for a BTL.

Have an appointment with broker Thursday to go through full application (I think!) but as a numbers person, I hate having to "predict" what might or might not happen.

If I knew exactly what would happen over the next few years, I'd be more than capable of making a decision but at the moment, it's a nightmare!

Think I may be leaning towards the 5 yr fix though...

PixelPound

I had a similar chat with my MA who said if the aim is to live there long term, which it was, then 5 year gave more stability. The LTV isn't likely to change much after 2, unless value increases significantly, s you need to factor amount saved in %age verses re-mortgaging fees after 2, and possibly again after 4 years.

Over the term of the next parliament interest rates could rise, but probably only 1% as they'll only do small increments. Though we could yet have deflation.
The housing shortage could continue to push prices up with a depressed building industry, or a gov't could go on a stimulus package of building houses and prices could flatline (I doubt any gov't would build enough to cause a crash).

So take your choice

getmore4less

They are currently on 80% LTV (£200k)

2 years on the low rate(£187638) will get them to close to 75%. (£187500)

Depends where there cuurent lender choice pitches the retention deals.

MJP43

There are no signs interest rates are going to rise soon and when they do it will be in small increments........that is the perceived wisdom anyway. But truth is nobody knows for sure.

Personally I'm not a gambler and would go for the 5 yr fix and be happy with the security of it.

JP08

One minor observation with fixed mortgages is that you are usually only able to overpay a limited amount for the fixed term.

So if you are half expecting a hefty lump sum to appear in the next couple of years (fixed investment maturing, say) that you would lump off the mortgage then a shorter fix may be slightly more attractive.