Which is the better of these 2 mortgages?

DebtClearer

Hi, we are first time buyers earning gross of around £48k combined but we only have a 5% deposit.

We are looking at 2 mortgages with the same company:

1) Fixed rate of 3.65% (£695 p/m) for two years then rising to the SVR of 4.94% (£800 p/m). No fees.

2) Discount of 1.9% so 3.04% (£644) for two years then rising to the SVR of £4.94% (£800 p/m). No fees and £250 cashback.

So far we were thinking that number 2 may be better with interest rates low and reportedly not likely to rise anytime soon. After the 2 years we would move our mortgage to avoid the rise to £800.

Any advice in relation to the above?

Mogley

If it were me I would choose No.2.
If I could afford both options then I would make sure I saved the £51/month and £250 cash back to mitigate the risk of any interest rate rise (not likely). You would have the savings to do with what you like.
Another option is that you could overpay the mortgage (if available) so that you increase your equity ready for re-mortgage in two years. The savings are then tied to your mortgage.
It does take discipline (which I lacked after buying my last house) but the reward is the additional security and knowledge you're not paying the higher interest.

DebtClearer

Thanks Mogley that was exactly our line of thinking so it is great to hear your thoughts.

Mogley

It's easy for me to say now in hindsight because when I had the opportunity to do it with my OH we didn't. We spent the additional money on lifestyle and paying off other debts. I see you are debt free (well done) so you don't have that burden.

getmore4less

you don't say how much you are borrowing.

do the numbers.
If we guess at £143k

after 2 years paying £495

1. £136536
2. £134512

£2k better off with 2 if rates don't move

DebtClearer

£152k will be borrowed for a £160k property.

The gamble is will the rates move but as has been suggested if we plan properly we can mitigate a small increase.

Thrugelmir

DebtClearer wrote: »

So far we were thinking that number 2 may be better with interest rates low and reportedly not likely to rise anytime soon.

That's the gamble. Tides can turn very quickly.

A reasoned guess would be that the lender has money that they want lent quickly out, hence the discounted rate. If there's high demand. Discount could be narrowed. Don't ponder too long if it's the product that you decide to go for.