Fixing rate for longer - 2 or 5 years

Glover1862

I've booked a 2 year fixed rate swap with the Coop (Britannia) but can change it anytime up to 31.01.2017, with all the news pointing to higher rates I'm considering a 5 year deal now, anyone thinking the same? Lots of poster here saying rates won't rise etc only a few weeks ago, now sentiment seems to have changed.

Deals on Offer (£130K remaining 17 year term):

2 Year fix 1.74% No Product Fee £736
5 Year fix 2.19% No Product Fee £764

My reason for going two years was that I can overpay by almost £1000 pm (10% per year allowed)and then looking for a tracker, maybe with unlimited overpayments. Going 5 years will mean I'll not be able to overpay as much but could always put the extra in a saving account which will help.

I suppose the answer is what rate I'll be able to get once a 2 fix over.... crystal ball stuff I know.

thirtytoseventy

I doubt there will be a lot of movement right now but 2017 could be rocky to say the least. Trump gets into the Whitehouse in January and Brexit will most likely start before the end of March, legal wrangles notwithstanding. It really could all go in any direction.

I am only considering 5 year fixes myself, the rationale being that if I can overpay 10% 5 years running then that is a decent chunk ready for whatever the situation is in 2022. As you say, crystal balling is all it is but if you know you can overpay I would lock that it for 5 years for sure.

Glover1862

It's a good plan if your overpayments stay within the 10% allowance, mine situation is a little different, using the mse overpayment calculator my balance starts at £130k, so no problem overpaying £1k per month, second year I'll be able to pay £900 max, still OK, 3, 4 and year 5 drops off massively. I wanted to get the whole thing paid and done with. I'll need to work out overpaying on the 2 year and see what my next rate needs to be to be worse off, I did work it out a while ago and think it was about 2.7% . Will we see a 1% increase in rates within 24 months?...crystal ball again!

spidereyes

I went onto a 2 year fix - my rationale was this;
Fixing for two years was 1.2% cheaper than fixing for five years
With overpayments over the next two years I will take my LTV from 80% to 70%.
My logic being that if I can lower my LTV quickly there's no point in 5 years time being fixed on a rate I took out at 80% when I would have say 50% LTV.
Obviously my logic only works if rates don't increase significantly and the lower LTV band offsets the difference in any rate increases.

As unfortunately I don't have a crystal ball it's a chance I have to take.

thirtytoseventy

OK so in that case, I get what you're saying. You need to work out the max you can overpay over the five years and then how much you can set aside above what you're allowed to overpay - and see where that leaves you at the end of five years. Remember, you can always invest any extra in another vehicle like some extra savings or a pension / rainy day fund.

I'm the same in as much as I plan on getting mine paid in 5 years rather than 25, but hey, 5 isn't bad! Allows you to formulate a solid 5 year plan instead of worrying about what might happen in 2. I'm fairly risk averse and like medium term plans, so it would suit me since I wouldn't find it too painful a thought that I could have paid it off a tad earlier. I prefer the peace of mind.

Good luck!

Glover1862

Yes, much closer call now the difference between 2 and 5 years is so small, less than 0.5%, however I've always had 5 year fixes and never been on the plus side of them. I'm on LTV anyway so that doesn't matter, just need to think if there will be a significant increase i.e. More than 1%, I don't think so, but did anyone forecast the massive drop in 2007.

spidereyes

thirtytoseventy wrote: »

OK so in that case, I get what you're saying. You need to work out the max you can overpay over the five years and then how much you can set aside above what you're allowed to overpay - and see where that leaves you at the end of five years.

One thing to remember though is not all lenders have the same overpayment criteria, for example some allow you to overpay 10% of the outstanding balance each year, thus as the capital decreases so do penalty free overpayments, but some will allow you to overpay 10% of the original loan amount each year (i.e. It won't change as capital decreases) so it's worth checking that too if your working on that basis

thirtytoseventy

Good tip - I was sure that the 10% was always of whatever is outstanding at the start of that (next) year. And yeah if there's any ERCs you surely just stop overpaying with six months to go or whatever and then just lump sum it at the end - BOOM!

Glover1862

It's 10% of the remaining balance at 31st December every year with me, I'm with Britannia (coop), I think Nationwide allow 10% of the starting balance which is excellent.

My plan would be after 2 years move lender as the coop tracker deals are rubbish, nearly 2.75 % with a hefty £999 fee, id want a low fee with max overpayment arrangement, Coventry building society with their flexx deals seem ideal, pay as much as you want for a very small rate increase for the flexibility.

Thrugelmir

thirtytoseventy wrote: »

I doubt there will be a lot of movement right now but 2017 could be rocky to say the least.

Signals are the Fed may raise interest rates in the US as early as next month. Still low by historical levels. But a change that will reverberate around various markets. Cost of money has many influences other than BOE base.

Dandytf

Thrugelmir wrote: »

Signals are the Fed may raise interest rates in the US as early as next month. Still low by historical levels. But a change that will reverberate around various markets. Cost of money has many influences other than BOE base.

Exactly, I recently noticed swap rates are rising,

I cannot have any complaints when interest rates do rise as I've had +4 years fixed since 2012 5.19.

Lets hope what has been mentioned countless times past few years, that US and more importantly BOE apply low increases.

Time will tell, this year I think I've missed these historically low rates.

My only consideration since is how often and by how much rates may increase until Aug' 2017.