Remortgage - 2 or 5 year fixed rate options

Dandytf

I remind myself It’s not going to take a lot for Natwide standard rate to rise-3.99 next week?

Scrimps

I don't know fewcloudy, I think bowlhead99 raises good points even if it is worse case scenario stuff. The people paid a lot of money to forecast rates don't know what will happen with rates but they seem to be betting still fairly low of the 5 year fixed wouldn't be ok deals...they're not predicting Armageddon....I bet their crystal ball is no better than mine though

However:

OP you could do with putting your current LTV, more info and a bit of horizon scanning info in your post.

Whats your LTV? are u near the next threshold to get a lower rate in a couple of years meaning that a 2 year fixed would be good so you can get the next rate down, or miles away and so it'll take u at least 5 years to get to the next threshold (assuming house prices stay stable). Are you planning a family in the next 5 years? Having a reduced income due to childcare and/or working part time/not at all could make the difference on affordability checks.
How close are you sailing to the wind with your mortgage payments at the moment? Could you afford anything over 2.09....if you fixed for 2 years and the best deal was 3 when to came to an end, would that be ok as far as you can forsee?
Any idea how your income is going to look in 2 years? Generally stable job/Industry?

They could both be good deals, changes in circumstances doesn't change that. It's just a change in circumstances, it's whether or not you could adapt to that change.

We fixed for 5 years. We were going to be starting a family and didn't want to 'stick out head above the parapet' with the building society for a while. We're also risk averse. The mortgage is manageable but the cost difference between the 2&5 year was negligeble. We have no desire to move for at least a decade.
We also reduced required payments by maxing out the term and are overpaying. If we needed to we could overpay more or stop payments completely and those overpayments would be used as our regular monthly payments...we're currently a year 'ahead'....not all mortgages offer that facility though.

All this was because of contemplating the what ifs, I sleep very well at night knowing I'm secure for the next 5 years but this scenario isnt necessarily right for you.

bowlhead99

fewcloudy wrote: »

There's so much wrong with this post that I can't even begin

But you'll have a go I see...

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.

You would need a pretty strong set of convictions to 'presume' a house price crash of 25% is going to happen as if it were a done deal. If you presumed that, you would likely sell, or choose not to buy.

But conversely you would be very naive to think a house valued at x today couldn't be worth 0.75x or lower in a couple of years time.

Here in London some properties are easily 33% higher than they were three or four years ago and that has no doubt been fueled by the continuation of the lowest interest rates in several hundred years of recorded history, with HTB support for first time buyers keeping the price propped up and the anti-landlording measures being cancelled out by foreign investor buying power with the pound becoming very cheap over the last year and a half. Meanwhile the specttre of Brexit threatens employment and immigration, banks and financial groups creating contingency plans to ship tens of thousands of jobs into Europe to preserve access to markets . So, it's not unfeasible for the price of a house of 1.33 to go back to 1.0 over the coming few years ; which is just the same as today's 1.0 becoming 0.75.

So, if I'm buying an expensive flat (in the price range where the future target buyer or tenant is affluent young professionals) and I know that market conditions *could* easily cause a price drop of 25% (not a presumption that they definitely will, just the knowledge that they quite easily could), the idea of taking a longer fix is eminently sensible.

When we buy valuable illiquid assets - whether bricks and mortar, stock market investment funds or whatever - we expect or hope that the prices will go up over the long term, but we don't expect that they will go up (or even stay flat) over short periods of two or three years. Pretty much anything could happen, including a sharp drop, and it's beyond your control. You only make it comfortably to the 'long term' if you avoid the disaster that is having to sell or refinance at a really awkward point in time along the way.

So, if you fix for a mere two years, you are literally agreeing to come back to the market and take what you can get, in a short timeframe when you have not cleared much loan principal and could face awkward conditions. That is a significant risk. With a longer fix you are signing up to simply ignore the short term and will have the ability to leave that fixed arrangement and buy into a new one on your own terms, over the course of the five years.

No I haven't been cowering in fear of financial armageddon for a decade. I work in the financial services sector, enjoy the odd trip to the casinos and have invested quite aggressively at times, borrowing to fund tax relief and all sorts of things. But I'm the sort of person who would recognise risks and not put all my eggs in one basket.

My contention is that agreeing to come back to the mortgage market in November 2019 to attempt to refinance in order to avoid being unceremoniously dumped onto an extortionate standard variable rate, requires you to make a ballsy call that the property will not have dropped by more than a few percent and that the loan to salary multiples and affordabilty algorithms are no harsher than they are today, and you will have an equal or better salary rather than a worse one, and interest rates will not have risen much.

We are all wired differently and we may all be 'stretched' differently by our current property arrangements and borrowings vs savings and other commitments. However I don't think I'm being irrational based on my personal circumstances. As Scrimps noted, the OP did not give us much of their own circumstances to go on, so I am giving some rationale for why I chose the path I chose.

"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?

At the moment most world governments and central banks are all taking the stance that rate increases must be gradual and limited. So, if you are signing up to a competitive medium term (five year) fix at only a couple of percent or so today and the rate does indeed just tick up by the odd quarter point in a very relaxed way in line with the signalling from those various world financial leaders, central bankers and economists, there will not be any point in paying a big ERC to leave your five year fix in year one or two of the arrangement.

However, when that stops being the prevailing attitude, one might want to exit the arrangement earlier than the full five years, perceiving that the conditions at the end of the five year term (in both interest rate and property price) might be looking like it could be substantially worse than paying off a couple of percent ERC and signing up to lock in a new medium term deal secured on a recent salary change or whatever, while enjoying a particular set of personal circumstances. That's why it's important to be aware of the 'option value' of a longer fix.

Effectively if I get a five year fix I have the ability to pay a penalty in year two or three if it suits me and move to a different deal in the market, or wait it out until the end penalty free at what I'm already comfortable is a broadly reasonable rate agreed today. Whereas if I get only a two year fix, I only have a very short window to make those choices about whether it would suit me to go back to the market or wait it out - for a very limited amount of time - and then all of a sudden that deal is over and I've been dumped back on the market needing to buy a new deal from whomever will lend to my circumstances on my property.

So, for where I am in my life at the moment - don't have a massive equity percentage, don't know what will happen to the value of my property in the short term, don't know if I'll still want to be doing my current job in a year or two (or if it will still exist if I wanted it); a longer fix is better than a shorter fix. There is still the choice of fix vs tracker which comes with their own pros and cons. But if you are going to fix, I am not a fan of short fixes because they don't give the 'stability' that is ostensibly craved by someone who actually wants to fix things and get stability. They can be a curse rather than a blessing if you get unlucky.