Fix for 2 or 5 years

Dawnr

Hi,

I'm looking for some advice.

We are currently in the process of buying our first property with a 80% Loan to Value ratio. We're looking at effective rates of around 3.5%. The repayment difference between a 2 year fix and a 5 year fix is around £500 per year, so significant enough to consider.

Should we fix for two years on the assumption that the ineterst rates are unlikley to increase during the eriod due to BREXIT etc, and then hopefully fix again for longer after the 2 years? Or should we fix for 5 years on the basis that the interst rate is as low as it's likley to get and we should count ourselves lucky and fix for the certainty of the 5 years.

Things to consider are:

We are likely to want children in around 5 years time, it would be good to have certainty during this period. WE will not have them within the next two years.

We got a good price on our property purchase for various reasons but the property is already likely to be worth more than we're paying for it. In two years time if we re mortgage we should have a loan to value ration of around 65% meaning much better rates than our current 80%.

I'm inclined to think we should fix for two years, pay less for two years. Hope the interest rates don't increase in that time before fixing after 2 years, at a 65% LVR, maybe for say 5 for security during the period of time we have children.

Does this make sense? Am I missing anything vital that I've not considered?

Thanks for your help.

Kind regards.

Thrugelmir

Remortgaging comes at a cost. While £500 a year sounds a lot. You could find yourselves spending a £1k after 2 years to remortgage to a new lender. With exit fees, valuation fees, legals fees and potentially product fees.

Should we fix for two years on the assumption that the ineterst rates are unlikley to increase during the eriod due to BREXIT etc

Who knows what might the cause of an interest rate rise.

retepetsir

Personally we have just fixed for 5 years (previously on a 2 year fixed) as I wanted the security of our future repayments. The monthly cost was slightly higher (60% LTV) but with product fees, etc, the difference wasnt that great.

fewcloudy

Dawnr wrote: »

Hi,

Should we fix for two years on the assumption that the ineterst rates are unlikley to increase during the eriod due to BREXIT etc, and then hopefully fix again for longer after the 2 years?
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Does this make sense? ...

Kind regards.

No, I'm not sure it does make sense.

Surely you mean you would fix if you felt interest rates were LIKELY to increase? If you are assuming they are UNLIKELY to increase, why buy a fixed rate product?

fc

getmore4less

If kids are planed for around 5y then a 5y fix could be a very bad choice.

Change time could well require notification of drop in income and restrict choices.

People have been saying rates can't get any lower can only go up for years

Then they went lower.

Why not get the cheapest deal(including fee factor) and overpay as if you had the higher rate.

Dawnr

Thank you all for your quick responses. I appreciate it.

I hadn't considered the fees for re-mortgaging and therefore this probably nets against the reduced repayments over the 2 year fix. Over-payments are a possibility, so may be worthwhile.

Saying that, it may still be the best option for us to fix for two years, as Getmore4less said, we don't want to be re-mortgaging at a time when we have reduced income and a potential dependant.

I guess the other option is a tracker with the view to re-mortgaging before we decide to have kids or if the interest rates seem to be increasing. Again the fees associated with this may mean it's not worthwhile. The fix also appeals to me for the security, especially as this is our first mortgage.

Thanks

getmore4less

Secure that you will pay more if rates don't go up.
It is a guessing game but some real data points are available to assess the situation from and informed basis.

Eg a 5y fix you know exactly how much you owe each month for a given payment.

You can work out what rate you need to get after a 2y fix to be no worse off. That tells you how much rates can go up before you are worse off.

getmore4less

Do not use APR if that is what you mean by effective rate as is that is meaningless for any practical purpose.

The rate that matters is the real rate during the fix

AnotherJoe

I as going to reply but getmore4less summed it up better than I would have done.
2 years.

It also means if circumstances change and you move within 5 years you aren't stuck with an ERC.

Cardinal-Red

It's an interesting gamble and nobody really knows what's going to happen. I am in the same boat roughly, where a 2 year fix at 1.94% compared to a 5 year fix at 2.99%. I calculated for the same monthly payment on each, our capital balance would be £7,000 lower at the end of year 2.

Then on the other side, are factors like unknown interest rates - seeing the news today about consumer spending, how long until this feeds into inflation and therefore interest rate decisions. If my fixed rate options in 2 years are 1% higher, then all the good work is undone, and by the end of the notional 5 year period it will cost more to be at the same point.

And with all the talk of lower house prices etc (whatever you believe, it must be a risk), what if when you come to remortgage, your LTV has gone up, not down, therefore removing the better rates from your grasp.

So in essence, who knows!

Waldorf_Statler

Make hay while the sun shines.

In other words, get the lowest rate possible and overpay, overpay, overpay. Whether that be a tracker or a shorter fix.

So then if (when) rates increase you're in the best shape possible.

Everything else is pure guesswork.