2 or 3 yr fix??

6954dave

Hello,

We've been offered either a 2 yr fix at 2.29% or a 3 yr fix at 2.79% on a £320,000 mortgage.

Upshot is, if we opt for 3 yr, then the added interest each year will be £1600.

Is the 3 yr fix worth that extra year at 2.79% and avoid a higher rate should intereat rates shoot up?

getmore4less

Yes if you believe interest rates will shoot up.

You can work out how much they need to shoot up to be worse of.

That way you can make a more informed guess than the current one.

AnotherJoe

6954dave wrote: »

Hello,

We've been offered either a 2 yr fix at 2.29% or a 3 yr fix at 2.79% on a £320,000 mortgage.

Upshot is, if we opt for 3 yr, then the added interest each year will be £1600.

Is the 3 yr fix worth that extra year at 2.79% and avoid a higher rate should intereat rates shoot up?

That would depend if interest rates would "shoot up" and by how much and when. I would regard saving potentially nearly five thousand pounds as well worth the gamble they won't since they would have to rocket to compensate for the savings You OTOH may be very cautious and prefer the certainty.

However ............

There's also the likelihood that if rates look like going up, it probably won't be for another couple of years, which will be right at "real" Brexit , so that first of all seems highly unlikely, and second if they did you might well get a better fix at that point than if you have to wait another whole year of rates rising and you get a fix then. (Plus if they don't go up for two years they would have to go up hugely in the last year to compensate for two years of low rates)

That's if you even believe rates will rise over the next 2-3 years, as you can see, I don't. And forget "shooting up" that's never going to happen.

YMMV on these predictions of course, they are logical and logic doesn't always apply to our politicians and bankers, but I don't think they are suicidal. Raising rates just as the UK actually enacts Brexit when a strong Pound would be catastrophic seems, as I say, extremely unlikely to me.

6954dave

Thanks for the replies. I think you're both right because interest rates would need to increase by 1.5% within the next 2 years in order to cancel out the savings made. Plus we'd be in a better position to fix at that point, and even release equity for home improvements earlier etc etc.

My wife is risk adverse so it's useful that others agree that the 2 years wouldn't actually be a risky option!

AnotherJoe

6954dave wrote: »

Thanks for the replies. I think you're both right because interest rates would need to increase by 1.5% within the next 2 years in order to cancel out the savings made. Plus we'd be in a better position to fix at that point, and even release equity for home improvements earlier etc etc.

My wife is risk adverse so it's useful that others agree that the 2 years wouldn't actually be a risky option!

I'd say that 3 is the far riskier because you'd (a) pretty much for sure pay more in years 1 & 2, and then although paying less in year 3, even if overall it comes out better, (b) you have a year of rising rates so when you do your next fix, you lose out because rates have risen even more whereas with 2 years you can grab a fix before they go up even more (this of course assumes that is the fear or prediction)

Had you been comparing say 2 vs 5 or 7 year fixes then at least you'd have a good long period of certainty about affordability, even if paying a lot more. The extra year between 2 & 3 doesn't buy you anything and could easily backfire. So she should be rooting for 2 also, its less risky.

getmore4less

repayment the numbers will be different from the I/O estimate

1. 2 yr fix at 2.29%
2. 3 yr fix at 2.79%
£320,000 mortgage.

you don't say term/payment but lets go for about 25y/1500pm

after 2years
1. £298181
2. £301363

£3200(ish) difference

after 3 years
2. £291647

3rd year rate after the 2y to break even 3.88%

if you can squeeze into a new lower LTV bracket in 2 years that could improve the benefit of the 2y option