Remortgage - 2 or 5 year fixed rate options

jimbo83

Hi all

Our product expires next month an we are looking at either a 2 year fixed rate of 1.59% or a 5 year fixed rate at 2.09%.

Given the chatter about an impending BOE rate increase, what do people think is the best option?

Current rate is 2.29% so both rates will reduce the mortgage payment.

Cheers

Debtslayer

Are you going to be wanting to move in the next 5 years? If you are then choose the 2 year option

zagubov

We're on your latter option as we've no interest in moving house or switching mortgage provider.

We just want predictability. Is that what you want?

jimbo83

No immediate plans to move although you never know.

Could we not just port the mortgage?

ViolaLass

If that deal allows porting, yes.

getmore4less

Do the numbers lower rate and overpay, see what rate you need in 2 years to break even over the next 3.

zorber

my personal view, dont know how much your looking to borrow!
interest rates wont go down from the current rate and only likely to go up.

You dont say if these are fee free rates or you have to pay an up front fee to secure them. would make a difference to my mortgage.

Projected rates are likely to start creeping up from as early as a couple of weeks when the bank of england announces its next review into the base rate.

The questions you need to think about are if you fix for 2 years whats the risk that interest rates have gone up by more than 0.5% ? so when you come to remortgage again you may not even get a rate of 2.09%. If you fix for 5 years at 2.09% your safe from and rate rises for 5 years which may save you more money long term.

If your mortgage allows porting then no risk of moving house.
Personally i would go for the security of 5 years of knowing what im paying with no increases in monthly expenditure.

History shows interest rates can shoot higher over night and know one can tell what effect brexit will have in a couple of years?

dimbo61

If you current deal ends next month you can apply now to get a new deal.
Check on your current lenders website to see what offers they have for existing customers

bowlhead99

zorber wrote: »

The questions you need to think about are if you fix for 2 years whats the risk that interest rates have gone up by more than 0.5% ? so when you come to remortgage again you may not even get a rate of 2.09%. If you fix for 5 years at 2.09% your safe from and rate rises for 5 years which may save you more money long term.

I agree,although there is a little more to it than that. Certainly a key point is that if you only fix for 2 years you will find yourself in two years time looking for a new deal to avoid the terrible 'standard' rate which you know is going to be quite a lot more than 0.5% higher than what you'll have been paying on the 2yr fix.

Imagine you are currently at 75% LTV (£75k on a £100k house, 25 yr mortgage). In two years time you will have paid off less than £5k so will still owe over £70k. Let's say interest rates have ticked up by half a percent or more but a whole variety of other market conditions (interest rates, brexit, general stockmarket tumbles) have caused a mini house price crash and your property dropped in value by 25% to only £75k (not impossible).

You may be thinking, ah no worries, I can afford half a percent extra on my mortgage, it's only a few hundred quid a year extra interest. But when you drop back to the 'standard variable rate' or whatever they call it, i.e. no longer on a 'deal', you could quite easily be looking at 4%+, which is a full two percent more than you are currently paying, literally doubling the interest component of your monthly repayment (and in the early years of a mortgage, the interest is the majority of each monthly payment).

So, you will want to do everything you can to get back onto a deal. However unfortunately owing over £70k on a house with only a £75k market value is not a great place from which to be seeking a great deal. People needing to borrow 95% do not get great rates, if they get offered anything at all. Oh also, imagine one of you were temporarily unemployed at that time... are you going to be able to hop lenders to find the best deal in the market "I'd like to remortgage with you at 95% and we only have one income but hopefully that's only temporary, what can you offer us...?"

Therefore IMHO you should not be thinking about what happens if the rate ticks up a little bit, you should be thinking about what kind of a position you would be in if the house price had also dropped and there was some other problem at the same time which meant you were effectively stuck on the standard rate - they won't evict you if you can pay it, but it's damn expensive: if interest rates go up by a percent or so, moving to that standard rate could be a 3% increase over your current 2% rate. Ouch.

The 5 year deal - if you don't want to move in next 5 years - gives you quite a bit of protection compared to the 2 year deal. Because by the time you put your head above the parapet you will have paid down some more capital on the mortgage, house prices have more time to go up before going down or more time to recover from going down ; you will have another three years of pay rises, more accumulated money in your savings or investment accounts, and so on.

And if something happens in the economy which makes it look inevitable that interest rate rises are going to happen thick and fast, you can always break early without waiting the full five years - pay an ERC in year three or four or five and lock into a new rate for a nice long period to avoid whatever rates look like they could be coming further down the road. But be doing it from a position of strength because you pick the timing yourself rather than being unceremoniously dumped back to the standard variable rate in 'my deal expired after only 2 years' land.

It is that kind of thinking that made me choose a 5 year fix even though 2 year fix or 2 year variable is less outgoing per month. If you don't plan to move for the 5 years, the extra per month for that longer term contract is an insurance policy against unforseen circumstances.

fewcloudy

bowlhead99 wrote: »

I agree,although there is a little more to it than that. Certainly a key point is that if you only fix for 2 years you will find yourself in two years time looking for a new deal to avoid the terrible 'standard' rate which you know is going to be quite a lot more than 0.5% higher than what you'll have been paying on the 2yr fix.

Imagine you are currently at 75% LTV (£75k on a £100k house, 25 yr mortgage). In two years time you will have paid off less than £5k so will still owe over £70k. Let's say interest rates have ticked up by half a percent or more but a whole variety of other market conditions (interest rates, brexit, general stockmarket tumbles) have caused a mini house price crash and your property dropped in value by 25% to only £75k (not impossible).

You may be thinking, ah no worries, I can afford half a percent extra on my mortgage, it's only a few hundred quid a year extra interest. But when you drop back to the 'standard variable rate' or whatever they call it, i.e. no longer on a 'deal', you could quite easily be looking at 4%+, which is a full two percent more than you are currently paying, literally doubling the interest component of your monthly repayment (and in the early years of a mortgage, the interest is the majority of each monthly payment).

So, you will want to do everything you can to get back onto a deal. However unfortunately owing over £70k on a house with only a £75k market value is not a great place from which to be seeking a great deal. People needing to borrow 95% do not get great rates, if they get offered anything at all. Oh also, imagine one of you were temporarily unemployed at that time... are you going to be able to hop lenders to find the best deal in the market "I'd like to remortgage with you at 95% and we only have one income but hopefully that's only temporary, what can you offer us...?"

Therefore IMHO you should not be thinking about what happens if the rate ticks up a little bit, you should be thinking about what kind of a position you would be in if the house price had also dropped and there was some other problem at the same time which meant you were effectively stuck on the standard rate - they won't evict you if you can pay it, but it's damn expensive: if interest rates go up by a percent or so, moving to that standard rate could be a 3% increase over your current 2% rate. Ouch.

The 5 year deal - if you don't want to move in next 5 years - gives you quite a bit of protection compared to the 2 year deal. Because by the time you put your head above the parapet you will have paid down some more capital on the mortgage, house prices have more time to go up before going down or more time to recover from going down ; you will have another three years of pay rises, more accumulated money in your savings or investment accounts, and so on.

And if something happens in the economy which makes it look inevitable that interest rate rises are going to happen thick and fast, you can always break early without waiting the full five years - pay an ERC in year three or four or five and lock into a new rate for a nice long period to avoid whatever rates look like they could be coming further down the road. But be doing it from a position of strength because you pick the timing yourself rather than being unceremoniously dumped back to the standard variable rate in 'my deal expired after only 2 years' land.

It is that kind of thinking that made me choose a 5 year fix even though 2 year fix or 2 year variable is less outgoing per month. If you don't plan to move for the 5 years, the extra per month for that longer term contract is an insurance policy against unforseen circumstances.

There's so much wrong with this post that I can't even begin. The main thrust of your argument seems to be based on a presumed house price crash of 25% coupled with the threat of "temporary unemployment" just as the fix is coming to an end. I'm all for a bit of forward thinking but do you always plan for financial Armageddon when it comes to mortgages?! If so the last 10 years must've been absolute hell for you.


"And if something happens in the economy which makes it look inevitable that interest rate rises are going to happen thick and fast"

Do you have anything in particular in mind? Not Carney and the BoE MPC saying that if and when rate rises happen they will be gradual and limited then?

fc

andrewf75

Been having a similar dilemma to the OP and am starting to think about the shorter fix or tracker. We may well be heading for some kind of armageddon with Brexit, but does that mean interest rate rises? I'm not sure it does. They will need to remain very low surely?