Remortgage: 2 year vs 5 year

maninahat

5 years ago I took out a Mortgage with Nat West on my first home. At the time I decided to go for a 5 year fixed rate deal as I felt that at the time it was more useful for me to have the security of a long fixed term and therefore fixed repayments while I got used to having my own place.

The 5 year fix is now coming to an end, and I'd like to avoid going on to Nat West's SVR. My problem is deciding between going for a 2 year or a 5 year fix.

My mortgage balance is £83,095 on a house that Nat West have valued at (using a desktop/HPI valuation to update the original value from 2012) £125,914, which comes out at 65.99% LTV

Now, from a quick look on some comparison sites, the "penalty" for going for a 5 year versus a 2 year fix is about 0.5%.

My personal feeling is to go for a five year fix, as BoE base rates are very unlikely to go much lower than currently, and a five year fix means I can ride out any economic turbulence coming from current political events. However a 2 year fix does give more flexibility.

What is the MSE hive mind's take on this?

AnotherJoe

maninahat wrote: »

5 years ago I took out a Mortgage with Nat West on my first home. At the time I decided to go for a 5 year fixed rate deal as I felt that at the time it was more useful for me to have the security of a long fixed term and therefore fixed repayments while I got used to having my own place.

The 5 year fix is now coming to an end, and I'd like to avoid going on to Nat West's SVR. My problem is deciding between going for a 2 year or a 5 year fix.

My personal feeling is to go for a five year fix, as BoE base rates are very unlikely to go much lower than currently, and a five year fix means I can ride out any economic turbulence coming from current political events. However a 2 year fix does give more flexibility.

A 2 year fix also gives lower mortage costs plus the abilty to overpay or put more in your pension. BoE rate isn't the only arbiter of mortgage rates, there have been some very low rates announced recently, even if fleetingly, after posts from people asking the same question as you "well surely rates cant go lower so I should fix for longer"

I also don't understand why you think a 5 year fix lets you "ride out economic turbulence " because one of the consequences of economic turbulence is likely to be job losses and in that case, having a lower rate or the flexibility to move makes a 2 year term better (perhaps you'd need to move to retain a job for example). Or if you took a lower paying job, not having the "security" of higher mortgage payments would be a help.

AFAICS the only "security" of a five year fix is the security of knowing you are paying more money, something that I'd happily dispense with, what did it cost you ? Not just the difference between the 2 year and the 5 year, but also the difference between the 5 year and new lower rates at the 2 year mark.

Whenever I see the sums done here, rates would need to rise extraordinarily high and fast in order for a 2 year fix followed by a 3 year, to work out more expensive than a 5 year. In times of "economic turbulence" ,raising rates high and fast would exacerbate the situation and be economic suicide. As would higher rates than Eurozone in a time of potential export tariffs if Brexit goes all Pete Tong. Why would they do that ?

getmore4less

Do natwest have a 65% change point,

might be worth finding enough to go under that if they do.

Look at how much less you will owe in 2 years paying the same as if you got the 5y fix.

maninahat

AnotherJoe wrote: »

A 2 year fix also gives lower mortage costs plus the abilty to overpay or put more in your pension. BoE rate isn't the only arbiter of mortgage rates, there have been some very low rates announced recently, even if fleetingly, after posts from people asking the same question as you "well surely rates cant go lower so I should fix for longer"

I also don't understand why you think a 5 year fix lets you "ride out economic turbulence " because one of the consequences of economic turbulence is likely to be job losses and in that case, having a lower rate or the flexibility to move makes a 2 year term better (perhaps you'd need to move to retain a job for example). Or if you took a lower paying job, not having the "security" of higher mortgage payments would be a help.

AFAICS the only "security" of a five year fix is the security of knowing you are paying more money, something that I'd happily dispense with, what did it cost you ? Not just the difference between the 2 year and the 5 year, but also the difference between the 5 year and new lower rates at the 2 year mark.

Whenever I see the sums done here, rates would need to rise extraordinarily high and fast in order for a 2 year fix followed by a 3 year, to work out more expensive than a 5 year. In times of "economic turbulence" ,raising rates high and fast would exacerbate the situation and be economic suicide. As would higher rates than Eurozone in a time of potential export tariffs if Brexit goes all Pete Tong. Why would they do that ?

Back when I took the mortgage out in 2012 I wanted the predictability and stability of a fixed rate product, and at the time there were rumblings that rates would be going up, so as you mention I decided I'd rather fix them at the (then) historically low rates.

My thinking now is that the last time the UK and Europe had an economic "difference of opinion" back in the early 1990s over the Exchange Rate Mechanism interest rates went mental.

A five year fix now would let me ride out the brexit negotiations with a comfortable safety buffer and, more importantly, my payments would be fixed and manageable during that time. A two year fix doesn't really give the same safety margin in my opinion, though I may see how much difference there is between 3 and 5 year options.

maninahat

getmore4less wrote: »

Do natwest have a 65% change point,

might be worth finding enough to go under that if they do.

Look at how much less you will owe in 2 years paying the same as if you got the 5y fix.

Thanks for the hint, but unfortunately NatWest's cutoff point is at 60%, and while I could probably afford to get the LTV to 65%, 60% is a bit too much of a stretch.

AnotherJoe

maninahat wrote: »

Back when I took the mortgage out in 2012 I wanted the predictability and stability of a fixed rate product, and at the time there were rumblings that rates would be going up, so as you mention I decided I'd rather fix them at the (then) historically low rates.

My thinking now is that the last time the UK and Europe had an economic "difference of opinion" back in the early 1990s over the Exchange Rate Mechanism interest rates went mental.

A five year fix now would let me ride out the brexit negotiations with a comfortable safety buffer and, more importantly, my payments would be fixed and manageable during that time. A two year fix doesn't really give the same safety margin in my opinion, though I may see how much difference there is between 3 and 5 year options.

And the lesson out of that was, you can't fix currencies by raising interest rates. eg the exact opposite of what you are now saying they might do again, raise rates. They would LOWER them if they wanted to have a "difference of opinion" .

However, if you've already made your mind up and are happy to pay more money for "stability" (aka "higher mortgage payments") and a better "safety margin" ( not sure whats safer about higher mortgage payments but hey ho), go ahead, but I wonder why you posted?

sevenhills

maninahat wrote: »

Thanks for the hint, but unfortunately NatWest's cutoff point is at 60%, and while I could probably afford to get the LTV to 65%, 60% is a bit too much of a stretch.

I personally prefer a 10 year fix, but would a 2 year fix allow you to get the best rate after that fix?

fewcloudy

maninahat wrote: »

Back when I took the mortgage out in 2012 I wanted the predictability and stability of a fixed rate product, and at the time there were rumblings that rates would be going up, so as you mention I decided I'd rather fix them at the (then) historically low rates.

My thinking now is that the last time the UK and Europe had an economic "difference of opinion" back in the early 1990s over the Exchange Rate Mechanism interest rates went mental.

A five year fix now would let me ride out the brexit negotiations with a comfortable safety buffer and, more importantly, my payments would be fixed and manageable during that time. A two year fix doesn't really give the same safety margin in my opinion, though I may see how much difference there is between 3 and 5 year options.

From your OP and this one, it seems obvious to me that you will choose the 5 year one. That's just the way some people are. And you might be right to do that, you might be wrong. But the reason you gave in the OP was basically saying "I just want to know what I'll be paying every month for the next 5 years whilst I get used to having my own place". Hmmm, that sounds pretty risk aversive to me. And now you feel that Brexit poses an additional threat to interest rates. If this is what you feel, fix for 5 years and be done with it. Highly likely to be more expensive for you over the next 5 years IMO, though maybe not to the extent that the last 5 years will have been. But many people are prepared to pay a price for the security of, well, paying more money than they would otherwise have had to for 5 years.


fc

maninahat

AnotherJoe wrote: »

And the lesson out of that was, you can't fix currencies by raising interest rates. eg the exact opposite of what you are now saying they might do again, raise rates. They would LOWER them if they wanted to have a "difference of opinion" .

However, if you've already made your mind up and are happy to pay more money for "stability" (aka "higher mortgage payments") and a better "safety margin" ( not sure whats safer about higher mortgage payments but hey ho), go ahead, but I wonder why you posted?

I posted in the interest of getting some advice, not to be the target of the of God's gift to personal finance on his or her off day!

I understand your argument regarding a five year fixed product costing more, however my worry is that a two year fixed product would mean I'd be trying to renegotiate my mortgage in what's probably going to be a much more uncertain time, and I'd personally not want to take that bet, but thanks for your input anyway.

maninahat

fewcloudy wrote: »

From your OP and this one, it seems obvious to me that you will choose the 5 year one. That's just the way some people are. And you might be right to do that, you might be wrong. But the reason you gave in the OP was basically saying "I just want to know what I'll be paying every month for the next 5 years whilst I get used to having my own place". Hmmm, that sounds pretty risk aversive to me. And now you feel that Brexit poses an additional threat to interest rates. If this is what you feel, fix for 5 years and be done with it. Highly likely to be more expensive for you over the next 5 years IMO, though maybe not to the extent that the last 5 years will have been. But many people are prepared to pay a price for the security of, well, paying more money than they would otherwise have had to for 5 years.


fc

That pretty much describes me to a tee when it comes to financial matters. I do understand that a 2 or 3 year fixed rate would work out cheaper than a 5 year deal, and something like a variable or tracker possibly cheaper still, but for me, its a bet I'm not sure I want to make, as I personally believe that the financial and economic situation is going to change within the next two years, and I'd rather know that my mortgage payments aren't going to be shooting up after two years.

maninahat

sevenhills wrote: »

I personally prefer a 10 year fix, but would a 2 year fix allow you to get the best rate after that fix?

I've seen some 10 year fix options about, but I'm wary of locking myself in for that long, considering the possibilities of changes in personal circumstances etc, and the rates aren't terribly good.