FTB - 2year fix or 5 year fix?

theartfullodger

Indeed: Last time I asked the broker to tell me which of several options, fees included, would be cheaper over 5 & 10 years. He couldn't (perhaps wouldn't), so I did the spreadsheet myself .

Hardly difficult, albeit assumptions need making.

MFWannabe

You need to study both options carefully
2 year fixes; you will be looking around again in 2 years time to remortgage (unless you want to stay on a variable rate) and probably having fees to pay again
5 year fix: Are you sure you will stay in the property for 5 years or will you possibly be looking to move again? If you look to move you will probably have early repayment charges. But a 5 year fix gives certainty with the amount that you will be paying; same rate every month over the next 5 years

kp0510

Thanks so much everyone for taking the time to respond, I really appreciate your advice. I will definitely do some calculations, and take it from there. I am trying to be cautious and making sure we will be able to afford the repayments when interest rates rise.

Our financial circumstances arent likely to change drastically in the next couple of years (aside from potentially a small pay rise for both of us - currently both earning £25k). We arent looking to start a family for about 4 years or so. Thats another thing I've been trying to factor in as well, making sure we can afford the repayments when that happens!

AlexMac

Good advice above, but assuming you're reasonably confident about your future income and employment prospects, the big unknowns are Interest Rate predictions, and, to a lesser extent, House Price Inflation. HPI varies massively by area; some regions are reportedly stable or even showing tiny falls; in my postcode (at least, according to Zoopla), its running at an eye-watering 13% p.a. - above the regional average reported by Nationwide. So, locally, I'm confident that prices will hold or continue to increase at least by over 5% p.a. over the next few years.

Interest rates are at a historic low, and have been for almost 7 years; as you can see at
http://www.bankofengland.co.uk/boeapps/iadb/repo.asp

And although analysts in the 'family finance' and business press have been predicting upward movement of one half or one quarter of a % point for a couple of years now, it hasn't happened. Forecasting is a mug's game, but I'm a mug, and I can't see Base Rates increasing by more than a tiny % in the next few years.

I certainly can't see them returning to the 5.5% which applied when I last took out a mortgage in the 'noughties, nor to the 10-12% which applied at the time of my second move in the mid 1980's, and certainly not to the eye-watering 15% peak when I first ever bought in the mid 1970's (when my £10k house only cost ten times more than a new family car!). But it makes you think?

I was lucky enough to opt for a lifetime tracker at 0.75% over base rate 15 years ago... so as rates tumbled, my monthly mortgage repayments tumbled from about £750 to under £150!

But that was luck rather than astute forecasting (or, given that I'd seen double figure past inflation, maybe naive optimism that rates would fall). And as they (almost)say, past luck is no guide to future fortune...

So do the spreadsheets, then reach for that pin!

kp0510

Thanks everyone. Leaning towards taking out a 2 year fix with a 10% deposit next spring as house prices in the area we are looking to buy (south west) are rising all the time. Would overpay by approx £100 a month and put money aside each month to save for remortgaging costs, with a view to remortgaging to a 5 year deal when the fix ends, as this would fit in better with our time line of starting a family. We were thinking of trying to put down a 15% deposit but i think by the time we achieve that, we wont be able to afford the higher house prices (assuming they keep rising at the rate they are now in this area).

I will do the spreadsheets and speak to a broker to discuss our options in more detail. Just wish there was a way of predicting what interest rates will do!

getmore4less

mrginge wrote: »

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

It could be enough to make a significant difference

Lets look at the OP £200k 90%LTV mortgage at say 2.5% 2y fix over 25 years

£897pm after 2 years they owe £188200 thats LTV of 84.7%

5% is a significant change in LTV for mortgages.

A 5% increase in value over 2 years and £63pm overpayment and they get below 80%LTV.

Up the overpayment to make it a round £1k they only need 4.5% HPI. to hit 80%LTV.

getmore4less

Pick a lender with good retention deals to match your new target LTV might have no/low fees in 2 years.

HouseBuyer77

I'm an FTB and went for a 2-year fix. The major reasoning was I'm still paying off my student loan but will be finished in approximately 2 years after I took the mortgage out. So whilst I had that financial commitment I wanted more certainly about my mortgage payments. Furthermore as owning a house/paying a mortgage was major change to my finances I wanted to keep things predictable.

Though long-term I believe I'd prefer a variable rate. After the two years are up as I'll have an increase in income due to the lack of loan payments so I'll be happier with the less predictable variable rate. Also due to the increased income I'll be happier paying a big chunk of my savings into the mortgage (I have an offset mortgage so most of my money is sitting in the offset account which gives me a good buffer for emergencies). So that combined with likely house price rises means I should manage 5-10% better LTV for my remortgage.

It also helped that my mortgage had a cheap product fee and cashback on completion that made it almost free.

Tygermoth

Thank you to the OP for posting the question. I have benefited greatly from the people that took time to answer.

I am still oscillating wildly between the two options - however beginning to settle on 2 year.....

GolfFoxtrot

mrginge wrote: »

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

Unless you overpay, I was a FTB 2 years ago 246k property on a 90% LTV, coming to re-mortgage now and I'm looking to get 80% LTV.