FTB - 2year fix or 5 year fix?

kp0510

Hi all, new to this forum and need a bit of advice :-)

My husband and I are currently saving a deposit for our first home. We have £8k saved and aiming to have saved £20k total by the end of 2016. We are aiming of a deposit of between £20k and £25k to put down on a property priced between £220k and £230k (so minimum 10%). I am keeping an eye on house prices in our area on Rightmove.

I know its a bit early to think about fixed rates, but i want to be prepared for when the time comes, then at least I know what we need to be working towards. I am not sure whether we should go for a 2 year fixed rate or a 5 year fixed rate. Obviously the repayments on a 2 year fix would be cheaper, but we will need to pay remortgaging costs in 2 years' time. Whereas the payments on a 5 year fix will be higher, but then at least we will be protected against interest rate rises for longer and we wont have the costs of remortgaging for a while.

I am wondering if it may be a good idea to fix for 2 years, then hopefully when the time comes to remortgage, we will have built up a bit of equity and be able to get a better deal with a better LTV. I know we will have to pay remortgaging costs, but I am thinking this may work out cheaper compared to paying a higher monthly payment with a 5 year fix.

I know no one can predict what will happen with interest rates, but I'm not sure if interest rates will increase enough initially to justify tying in at a higher rate for 5 years. Regardless, we will definitely make an appointment with a broker when we have enough deposit saved to discuss our options.

Any thoughts would be appreciated! Sorry if this is a bit of a ramble, just trying to get my head around everything!

mrginge

You will pay very little equity off in the first two years of a mortgage.

MrJB

mrginge wrote: »

You will pay very little equity off in the first two years of a mortgage.

Exactly this - I tried explaining to a friend who took out a 2 year mortgage claiming that he would re-mortgage at the end of the fix and get a better deal - The limited equity coupled with potential remortgage costs may make them no better off!

Effectively taking a 2 year mortgage you're gambling that house prices are going to keep moving upwards so that the mortgage debt is lower - there are various schemes allegedly coming through the pipework which will see supply rise significantly (that said I cannot see it as we lack the workforce to do the building!) - I suspect you'd need to have 25% equity to see a noticeable difference in rates for it to pay off - whether house prices are going to move up 15% over the next two years is uncertain, but I cannot see them cooling off anytime soon!

theartfullodger

kp0510 wrote: »

........Obviously the repayments on a 2 year fix would be cheaper, but we will need to pay remortgaging costs in 2 years' time. ......

errr... no. NO!. It will be "fixed" at a rate for 2 years then go onto a variable rate (usually called SVR) which may or may not be a good deal.

Unless you've been bonkers enough to take out a mortgage with only 2 years before it needs paying back.

Did a mortgage broker by any chance suggest re-mortgaging at end of fix period ?? He's after the fees, in't he...

AubreyMac

I bought my first flat last year and went for a 2 year fixed.


Without knowing too much about mortgages (and even less about remortgages), the reason I went for 2 years was:


1) Lower product fee, a 5 year fix would have a much higher product fee and over the 3 extra years it worked out roughly the same as I started my mortgage when interest was just over 1.5%.


2) Easier to get out after 2 years (I think), I found the buying process very stressful and it is a ex council flat with most people on the block still remaining as council tenants. I thought (rightly or wrongly) that 2 years will give me time to decide if I want to stay or leave (and either sell or rent out). If I found myself miserable there (either with neighbours or freeholder), I think getting out after the fixed term is easier so didn't want to leave it til 5 years.


I don't know if no2 is true though, it was just my thought at the time and luckily I'm happy where I am. When my 2 years is up next year, I plan to have a 5 year fixed.

ReadingTim

You're basically paying for certainty - the certainty of knowing what your repayments will be each and every month for the next 24 or 60 months. The fees are higher for a longer period of certainty than they are for a shorter period of certainty.

If you like certainty, a 5 year fix will provide more of it than a 2 year fix. If you like a bit of a gamble, then a 2 year fix might be better, and you don't have to remortgage when it's over - you could revert to the lenders' SVR and take your chances then.

But it's not just interest rates you want to consider - what about your own circumstances? If you think your income is likely to rise significantly (or at least above inflation), you could probably afford to be riskier than if you think it's likely to drop (say starting a family and being on maternity leave) where having a longer period of certainty over costs would be useful.

Mulder00

You will need to sit down and calculate it all. Also bear in mind there are different penalties and fees based on what you decide to do.

I was quite surprised when I did that for our own mortgage and I found that financially, we would be better off to only take a 2 year fix (I did my calculations based on a 5 year time horizon, a 1% increase in interest rates after 2 years and a further 0.5% a year later and a further 0.5% a year later). Also, each month I calculated the "what-if" we decide to sell and the associated costs.

We only had the option of a 2 year or 5 year fix and the mortgage broker wasn't biased towards either and left the decision entirely up to us. I was convinced that the 5 year deal was the better one until I sat and did the calculations and realised that even with a fairly substantial rise in rates, in my opinion the 2 year fix is worth the gamble.

One other major aspect also depends on how much this mortgage will stretch you and your household's ability to generate more income over the next 2 years vs 5 years.

Kynthia

As well as what's been mentioned above I also considered any changes in our circumstances that would affect remortgaging in 2 years time compared to in 5 years. Will your income drop for any reason or your expenses increase (childcare costs and possibly going part - time at work), will either of you be in a new job or possibly going self-employed, will you possibly have more debt (new car, furniture, expensive works on the property, paying for a wedding). All of these could reduce your mortgage borrowing ability compared to now, reducing how much they will lend you or worsening the rate. Considering in 2 years you won't have paid off much capital then you could be forced to stay on the SVR which is usually uncompetitive. If none of these apply to you then comparing the costs and assessing the risks of interest rate rises will help you make your choice.

matchboxfull

Mulder00 wrote: »

You will need to sit down and calculate it all. Also bear in mind there are different penalties and fees based on what you decide to do.

I was quite surprised when I did that for our own mortgage and I found that financially, we would be better off to only take a 2 year fix (I did my calculations based on a 5 year time horizon, a 1% increase in interest rates after 2 years and a further 0.5% a year later and a further 0.5% a year later). Also, each month I calculated the "what-if" we decide to sell and the associated costs.

We only had the option of a 2 year or 5 year fix and the mortgage broker wasn't biased towards either and left the decision entirely up to us. I was convinced that the 5 year deal was the better one until I sat and did the calculations and realised that even with a fairly substantial rise in rates, in my opinion the 2 year fix is worth the gamble.

One other major aspect also depends on how much this mortgage will stretch you and your household's ability to generate more income over the next 2 years vs 5 years.

We went through this exact thing last week before we applied for our mortgage. We were surprised, as you were, but interest rates would have to rise a fair whack over the next two years for us not to have saved money by taking a gamble on getting a 2 year fixed. This is because the 2 years are much cheaper. We were also working on a 5 year time-frame and factoring in the cost of buying a new product after 2 years.

There is, of course, a chance that interest rates will rise quickly and sharply, wiping out those savings, but we're willing to take that chance.

We worked on the basis of comparing both scenarios over the next five years because we're hoping that by then we could be at least close to a decent LTV.

benjus

If you are looking at 90% LTV when you buy, and you are eligible for a low rate mortgage (say 2.2% on a 2 year fix), and the value of your home rises by 3% or more per year for the duration of that fix, then you'll be able to remortgage at 80% LTV at the end of the fix (assuming 25 year term). If the value of your home increases by more, you might make it to 75% LTV. So IF interest rates are still very low in 2018, you should be able to re-fix at a better rate.

But that's a lot of IFs. In the current climate it looks achievable, but things might look very different in a couple of years' time - it's impossible to say. For several years people have been saying "interest rates really MUST start to rise very soon", but so far they haven't. That could change, or it might not. Fixing for 5 years now would cut out that uncertainty.

Your call really.

DPDRC90

I'd take the advice given above and create a spreadsheet to understand each scenario, least then you'd have a better idea moving forward.