Fixed rate mortgage - 2yr 1.89% or 5yr 2.21%?

JimmyTheWig

I'm torn on this one.
Normally go for a longer fix and am then gutted when rates don't rise.
Affordability not really an issue - we pay the same amount each month regardless of the rate. Just looking for the best value.

Options are
1.89% for a 2 year fix, no product fee
2.09% for a 5 year fix, £999 product fee - this is the equivalent of 2.21% fee free
1.49% for a 2 year tracker, £999 product fee - this is the equivalent of 1.79% fee free

Obviously there's no right answer without the benefit of hindsight. But what do you think looks better value?

Peelerfart

Hmmm,

Nice to see such an accomplished poster asking such a question

Normally I'd have gone for the longer fix but,
A, I can see your quandary, and
B, I no longer have a mortgage

But
C, I hated paying product fees so much, I only paid one once and vowed never again.

So if it was a vote, 2 year fix

Dandytf

2 year fix is my 1st thought
Though 5 year fix possibly misses quite a few .25/.5 increase over next few months/years.
I too avoid paying 999 fees even if it costs a little more over term of chosen mortgage -unless you have 999 to spare!

getmore4less

missed of the important bits of information

The amount being borrowed and the planned payment.

and the rates for the fee/no fee options from the lender(s)
unless that's what you meant by equivalent

JimmyTheWig

Mortgage balance is £167k.
£999 fee is 0.6% of the balance.
So that's the equivalent of 0.3% interest a year on a 2 year deal or 0.12% interest on a 5 year deal. That's what I mean by the "equivalent of" interest rates.

I've discarded the 2-year fix with a fee as the rate was higher than 1.59% (so equivalent rate higher than 1.89%) as well as the 5-year fix with no fee as the rate was higher than 2.21%.

It's an interest-only mortgage, with 24 years left to run.
Difference between interest and £1107 put into pension to pay it off. Current forecast is between 11 and 13 years left to pay it off, so plenty of time before it's needed.

getmore4less

For interest only the correct equivalence is to use the payment that just covers the interest on both fee/no fee option where you use the fee to pay off some of the debt on the no fee.

rate * amount/(amount - fee) = rate * 1.006018 (for £167k £999)

you don't then divide by the number of years

JimmyTheWig

getmore4less wrote: »

For interest only the correct equivalence is to use the payment that just covers the interest on both fee/no fee option where you use the fee to pay off some of the debt on the no fee.

rate * amount/(amount - fee) = rate * 1.006018 (for £167k £999)

you don't then divide by the number of years

Not sure I follow you.
Are you saying that if I don't spend £999 on a fee then I can pay £999 off the mortgage. Fair enough.
In which case the interest I pay on the no-fee deal will be less than it would otherwise.
And when that "less than it would be otherwise" interest is equal to the fee-product interest is the break even point?

If that's what you're saying, then at the end of the deal your mortgage will be £999 lower with the fee-free deal than if you paid a fee.

JimmyTheWig

Any other thoughts? Planning on making a decision tonight / tomorrow. Might just toss a coin...

On-the-coast

From someone with very little posting history, but has recently paid off a 25yr interest only mortgage... and remembers rates of 8%-10% in the early years..

The trade off analysis between 2yr fix and 5yr fix seems simple to me:
Do you think you are going to save £2000 in years 3-5 ?
The 5 yr deal is approx that much more expensive in total in the first 2 years.
(£1000 fee +2yrs at 0.3% interest)

To answer that question, what in your opinion is the probability that rates will be on average more than 0.4% higher in 2years when you come to refinance?
0.4=£2000/3/mortgage

I know what I would do - fix and fix long for peace of mind.
Best wishes

enthusiasticsaver

As the payment is affordable to you and presumably should rates increase within the next 2 years this wont be a problem I would go for the 2 year fix without the product fee. If it is peace of mind that you know what your payment will be for the next 5 years then go for the 5 year fix.

Personally though I would do the 2 year fix and alongside that save preferably somewhere that pays more than 1.89% like Tesco current accounts. If in 2 years time then interest rates have risen I would make a lump sum repayment from the current account. I personally don't think interest rates will rise very quickly in the next 2 years and certainly not to levels like 8 to 10%.

getmore4less

JimmyTheWig wrote: »

Not sure I follow you.
Are you saying that if I don't spend £999 on a fee then I can pay £999 off the mortgage. Fair enough.
In which case the interest I pay on the no-fee deal will be less than it would otherwise.

And when that "less than it would be otherwise" interest is equal to the fee-product interest is the break even point?

If that's what you're saying, then at the end of the deal your mortgage will be £999 lower with the fee-free deal than if you paid a fee.

Yep, I messed up the end point.

You need to make the cash starting point the same and the cash inputs the same because of the timing of the cash flow changes the numbers.

Easier to do with the add the fees.
with round £ and 5 years fix with a £999 fee @ 2.09%

£167999 @ 2.09% needs a payment of £309 to get to £166,963 in
£167000 paying £309pm with a rate of 2.216% gets to £166,962

Your estimate of 0.12% is 5% out.

For some mortgage sizes that could be enough to pick the wrong one.

In many cases there are other factors driving the choice, one of your seems to be the investment return in the pension so an extra £1k on that return needs to be factored into the breakeven