5 or 10 year fix - what would you do?

jamiewakeham

Morning all


Starting to decide what to do with the mortgage when current deal runs out in a few months. I am keen to fix, and can't decide if I should fix for five years or ten.


This is our last house - it's very hard to think of a scenario in which we will move again. We have £180k outstanding, 16 years to run, and we want to add an additional £40k to the mortgage to allow us to do all the work the house needs.


I've run six scenarios:

- two where we get ten year fixes (a less good one from our current lender, Nationwide, at 2.69% and a better one where we get it from the Coventry at 2.25%)

- four where we get the offered five year fix from N'wide at 1.89%, and then the second five year fix is at 1.89%, 3%, 4% and 5%. This, of course, is the unpredictable bit!


They show that, if the rate I can get in five years time is about 2.8% or less, then the two five year fixes win even over the Coventry 10 year fix. So, presuming we are accepted for the Coventry (so far I've only checked with Nationwide), my gamble is do I think five year fixes in 2024 will be more or less than 2.8%.


I know this is a how-long-is-a-piece-of-string question, but what do people reckon? Thanks for any opinions!


Cheers,
Jamie



Calculations:
In all cases, assume beginning my repayments at £1411/month on a loan of £220,000 over 16 years, adding the fees back into the debt.

Nationwide 10 year fix at 2.69%:
Monthly repayment £1411, therefore overpayment is £0. Total cost of ten years is £169,320, at end of the ten years we will owe £94,153

Coventry 10 year fix at 2.25%:
Monthly repayment £1371, overpayment is £40. Total cost of ten years is £169,320, owe £86,915

Two subsequent Nationwide five year fixes: first at 1.89%, second at 1.89%
First five years: repayment £1335, OP is £76. Total cost of five years is £84,660, owe £154198
Second five years: repayment £1303, OP is £108. Total cost of five years is £84,660, owe £81,850
Overall, total cost of ten years is £169320 and we end owing £81850

Two subsequent Nationwide five year fixes: first at 1.89%, second at 3%
First five years: repayment £1335, OP is £76. Total cost of five years is £84,660, owe £154198
Second five years: repayment £1382, OP is £29. Total cost of five years is £84,660
Overall, total cost of ten years is £169320 and we end owing £89071

Two subsequent Nationwide five year fixes: first at 1.89%, second at 4%
First five years: repayment £1335, OP is £76. Total cost of five years is £84,660, owe £154198
Second five years: repayment £1455, OP is £-44. Total cost of five years is £87300
Overall, total cost of ten years is £171960 and we end owing £93007

Two subsequent Nationwide five year fixes: first at 1.89%, second at 5%
First five years: repayment £1335, OP is £76. Total cost of five years is £84,660, owe £154198
Second five years: repayment £1531, OP is £-120. Total cost of five years is £91860
Overall, total cost of ten years is £176520 and we end owing £95068

getmore4less

what are all fees?

somethingcorporate

We went through this exact dilemma. We just sent off the application for the Coventry 10-year with offset.

getmore4less

10y @ 5&10
£220,000 10y 2.25% £1411pm £156,653 £85,770

2*5
£220,000 5y 1.89% £1411pm £153,070 (10y £79,512)
£153,070 5y 2.87% £1411pm £85,740

You have 4 rate rises in the pocket before fees and more overpayments.
what about any change in LTV that gives a lower rate?

rates don't move its a £6200 gamble over 10 years

Probably less as the chances of at least one rate rise seem higher than none.

edit : add a £1k fee at year 5.
£154,070 5y 2.70% £1411pm £85,780

jamiewakeham

They are all £1k fees (plus/minus a few pounds) and to keep the comparison fair I have rolled each fee straight back into the debt (so the two five-year calculations correctly include the fact that I'd pay fees twice).


LTV is already below 50% so rates won't decrease any more than these.


Edit: just got off the phone with Coventry who are very happy to give us their 10 year fix at 2.25%.


Edit 2: one thing they did mention was that their 10 year product becomes exit-fee free at five years. So if we did lock in at 2.25% and rates remained low, at five years we can switch to a different product with no penalty. That's making it even more attractive...

jamiewakeham

Just drew this - scientists are always happy when they can draw a graph..! I think it's really pushing me towards the 10 year fix.

Axes are 'saving if I take the 10-year fix from the Coventry', versus 'what the best five year fix available in 2024 is'. The curve below about 2.1% is the effect of being able to get out of the10-year fix and remortgage fee free after five years; if the rate available is les than 2.1% then it will be worth ditching the 10 year fix and switching. It hugely mitigates the loss of being stuck at 2.25% if rates stay low, and means my worst possible loss in a low-rate scenario is about £4k.

kuratowski

Looking at this from another perspective, it's not really a question of what future interest rates will be: you can't know that, no one does.

How much are you willing to pay for certainty about your mortgage payments in 6-10 years' time? Is the answer more or less than £36 a month?

getmore4less

If the fees now are the same and can run the 10y for 5 year and exit free.

Then the switch out rate is 2.25% to a no fee or lower compared to a fee deal.
£1k fee on £150k 5 years is around .0.0013%

[STRIKE]There is only 1 rise of safety built in with a 5year free exit option.[/STRIKE]

Worst case is you leave the 10y and could have saved £3,600 if you had taken the 5y.

poppy10_2

The Coventry deal seems to be a no-brainer

jamiewakeham

I think it is the right way. My wife is all for the fix - when we looked at that graph and I explained that maximum losses if rates stay low are <£4k, but maximum gains if rates take off are uncapped, she immediately made her mind up! And for me, realising that it will take three quarter-point rises in the next five years to hit the tipping point has pretty much made my mind up.



Going through it here has really helped solidify the decision - thanks, all.

getmore4less

edit : ignore

[STRIKE]It's only 3 rises if you are locked into the 10y fix
(even then it might be a bit less as it depends on the ERC)

with an ERC free exit at year 5 you only need to test the first 5 years and that is 1 rise.[/STRIKE]