MSE News: 10 year 2.39% fix – should you grab it?

colinm

I was trying to work out if it's cheaper to keep switching every few years or whether to lock in for 10 years whilst rates are low.

For example, borrowing £100k over 10 years will cost a total of £114,000 including fees, with this Coventry 2.39% mortgage.

I guess the main disadvantage is that towards the end of the term you're still paying a large sum of money each month whereas your mortgage will have reduced substantially.

What I'm not sure about as it's hard to work out is what the potential savings would be to keep switching...of course it depends on interest rates over the next 10 years, but assuming they stay low, it's presumably cheaper in the long run to keep switching?

Anyone got any thoughts?

marsman802

The lower your mortgage balance gets makes it less and less favourable to keep switching due to the fees involved outweighing the savings in interest periods during the term it covers.

You would want to keep switching whilst it is saving you money however at some point you probably need to think about fixing for the long term to avoid overpaying further down the line.

However there are soooo many different situations it is impossible to give you a perfect answer

colinm

Thanks for that marsman...understood - there are so many variables.

I thought I'd just see what the monthly repayments would be if the loan amount and term were halved (ie. £50k over 5 years) and it's actually very similar and with the fees actually makes very little difference. So locking in for 10 years and providing certainty of your outgoings may be preferable to switching and paying fees (unless you keep getting fee free).

Maths was never my strong point but of course this makes sense. I had it in my mind that if you halved your mortgage in 5 years and then moved for the final 5 years, the cost of the repayments would also halve (roughly). But of course as it's all on %s then it doesn't make a huge difference.

getmore4less

It is really easy to do the comparison between a ten year and multiple alternatives using todays data. Say 2x5 or 5x2

A bit tedious if just using a regular calculator but not that hard to spreadsheet.

If I get 30mins I will do the above 2 options with the same lender.

The key with a lower rate is paying the same and reduced debt.

The break even on a fee no fee 7y with Barclays was £35k on one I checked recently.

getmore4less

OK got some time to do them

lets look at the offering for a remortgage by Coventry for comparison.

http://www.coventrybuildingsociety.co.uk/mortgages/remortgaging.aspx

every deal 2,5 7 are cheaper with or without the fess than the 10y deals.

all the deals qualify for free legal and valuations.

fees are £0 or £999 and they also offer a flex(unlimited overpayments with a £499 fee on a 2y and a 5y. which may be handy for those that can overpay by more than the 10%pa.

looking at the 10y the rates are 2.39% £999 fee or 2.69% £0 fee

the break even fee/nofee over the 10y term are quite low around
£38k interest only
£69k 10 year full term
other longer full terms will be between those.


looking at £100k over a 10y(£947pm) and 20y(£530pm) term after 5y and 10y
(rounded to the nearest £1)
£100,999 @ 2.39%
10y term(£947pm)
5y £53,515
10y £10 (£947 is a tiny underpayment)
(£113,650 total to pay off the debt)

20y term
5y £80,063
10y £56,473

.......................................
OK lets looking at the first alternative - 2 consecutive 5y deals
(checking the retention deals there are none better than the standard 50%LTV on the link above)

5y are 1.94% £999 fee or 2.09 £0 fee.
break even over 5 years fee/nofee around
£75k i/o
£180k 10year full term


again over 5y and 10y on 10y and 20y terms paying the same as the 10y fix

£100,000 @ 2.09% (no fee is cheaper than the fee in both cases)

10y term(£947pm)
5y £51,165 (£2300 ahead so far
10y £0 paid of 3 months early
(£110,602 total payments saving just over £3K over the full term)

20y term(£530pm)

5y £77,515 (£2.5k ahead)
10y £52,556
nearly £4k ahead at year 10.


Overpayments will make the saving smaller.
those sorts of savings may not be enough to go with the 5y options.
In per month numbers to pay off at term 10y or 20y is a £20pm saving £2400 over 10 years so matching the 10y payment improves the savings.

Another measure is the breakeven interest rate at year 5.
4.20% 10y term thats 2% more than the current 5y rate.
3.19% 20y term only 1% more than the current 5y rate

---

the 2y fixes are 1.49% £999 fee 1.79% £0 fee

breakeven over 2years fee/nofee
£79k i/o
£186k 10y

£100k with no fees on the 2y amounts owing at each change
full table same payments as before (£947,£530)

---

10y term

---

|

---

20y term

---

year----10y fix---2y fix----|---10y fix

---

2y fix
0y.....£100,999..£100,000...|..£100,999..£100,000
2y......£82,683...£80,520...|...£92,923...£90,701
4y......£63,471...£60,330...|...£84,452...£81,064
6y......£43,319...£39,406...|...£75,568...£71,076
8y......£22,181...£17,719...|...£66,248...£60,724
10y.....£10.......£0(-5m)...|...£56,472...£49,995


the basic rules when looking at the savings are
bigger the difference in rates the more you save.
owe more, save more
pay more, save less

The max savings are on big mortgage, interest only.

BUT on higher payment profiles(shorter term) the profile can take higher rate changes so although the savings are smaller on another measure they are safer

.....................................

Crunching the numbers is relatively easy, interpreting them and understanding what the risks really are is the harder bit.
many think fixing is the low risk/risk adverse option because they only look at the risk of the payment changing and not others like the risk of paying to much.

what you can get from them is a measure of the cost of taking a long term fix based on todays data should nothing change, the next bit to do is look at what rate changes would change the outcome, I did it for the 2 x 5y option as that has only one data point at 5y.

Coventry also have a 7y fix at 1.99% with a £999 fee

At y7 that would put a £100k mortgage ahead at y7 £3675(10y term) and £4620(20y term)

colinm

Thanks that's really helpful getmore - I need to read it a few more times but very useful to see those comparisons. Like you say no-one can predict what will happen in the next year yet alone the next 5-10 years...but all being equal it certainly looks like a 10 yr lock in isn't the best option.
Thanks again I found this very helpful and I'm sure others will!

getmore4less

I think many go into deals without a clue what they are mitigating.

the temptation of my payment will be the same for X years seems to put the rose tinted specs on when in many cases they could achieve the same and have a smaller debt at the end.

AnotherJoe

getmore4less wrote: »

I think many go into deals without a clue what they are mitigating.

the temptation of my payment will be the same for X years seems to put the rose tinted specs on when in many cases they could achieve the same and have a smaller debt at the end.

Agreed, you often see soemthing like "I like to know what my payments will be" (I think the OP said that) whereas my position is "I'd like to know that I'll be paying much less than had i bought a very long fix". With most of the deals I've seen posted here, unless rates rise very high and very quickly after you start, shorter term fixes work better as theres usually ample time to fix should it look like rates will rise longer term.

getmore4less

AnotherJoe wrote: »

Agreed, you often see soemthing like "I like to know what my payments will be" (I think the OP said that) whereas my position is "I'd like to know that I'll be paying much less than had i bought a very long fix". With most of the deals I've seen posted here, unless rates rise very high and very quickly after you start, shorter term fixes work better as theres usually ample time to fix should it look like rates will rise longer term.

the key is that the lower rate should not mean lower payment, you pay the same as if you had the long rate and end up with a smaller debt.

That is one of the best ways to mitigate rate rises.

As the 2x5y over 10y option shows, £20pm buys you 2% at year 5.

could do the same calc for the 2y.

I wonder if the "My client said they wanted the security of a fixed payment" is the easy get out for the compliance and protection from miss selling that results in many ending up with fixed rather than the other options which often could save them loads of money.

fru-girl

@colinm:

I don't think brokers advocate/like 10-yr deals, take the advice with a grain of salt... all those calculations are speculative.. and what's the point in comparing 5 2-yr deals (which incidentally brokers love) with 1 10-yr deal, when there isn't any certitude about what the rates will be for the 2-yr ones? The 10-yr deal offers you peace of mind, knowing what the rate is, being able to plan your finances long term. If it's a low enough rate, which it looks like it is, then you get the best of both worlds - rate security at a low cost, maybe not the lowest around but 2.39% is quite low IMHO.