Fixed Rate Mortgage - 2 Years vs 5 Years

mither_2

Hi All,

Interested to hear different thoughts on this.
Our situation 
Offered a 75% mortgage by Barclays
Barclays were recommended to us as they are able to complete quickly so we can do so before the end of the SDLT holiday. 
£600k property
2 year fix = 1.57% vs 5 years = 1.70% (Barclays have since moved this up to 1.78% but we can keep the 1.70% rate as agreed before the change)  
£999 fee 
My preference is for a 2 year fix because:
a) I don't expect interest rates to rise significantly by Jan 2023 when the fix expires.
b) By 2023 we'll have additional funds available to reduce the mortgage and get to a 60% LTV and hopefully secure a lower rate (I have money in fized rate deposits which I can't draw out currently)
c) When borrowing a relatively large amount paying the £999 fee is less important than the interest rate and/or the potential to get onto a lower LTV later 
c) We'd like the flexibility to negotiate a new deal in two years
e) We don't necessarily know that we still want to be in the property in 5 years and so want the flexibility to move and take out a new mortgage (a 3-4 year deal would work well but there are relatively few good options available currently)   
f) It seems unlikely that the BoE base rate will be increased significantly in the next 24 months. If posters think it could/will increase then please explain why?  
g) It feels like a lender's market at the moment with so many people trying to buy ahead of the end of the SDLP holiday. Hopefully by January 2023 they will need to be more competitive. If we have a 75%/60% LTV then there should still be attractive terms available to us (any thoughts on this? As I understand it some lenders have increased their rates recently so that they are less attractive but can still secure lots of new business) 

My partner would prefer to go for a 5 year fix but the main advantage of this is that our repayments are fixed in the event that we both lost our jobs (unlikely that either of us will - there is always the risk however) or interest rates went up significantly but I don't see this happening in the next 24 months so we would get a similar or better deal in Jan 2023.   
Any thought/ideas welcome.
Thanks in advance 
  

SpiderLegs

Sounds reasonable to me. Interest rates are going to be very low for a very long time imo.

mither_2

SpiderLegs said:

Sounds reasonable to me. Interest rates are going to be very low for a very long time imo.

That's my feeling too. Nobody has a crystal ball but if someone is a good credit (75%/60%) then I would assume that the rate would remain low. If property prices start to reduce significantly i would assume that lenders would increase rates for high LTVs or remove their offers.  

MFWannabe

Because of b and e in your list I would say you’re better taking the 2 year option 

Thrugelmir

Sounds as you've justified the decision to yourself as to why a two year fix is preferable.  In the middle of a global pandemic I wouldn't say this is a lenders market. Risk is priced.  Mortgage books are carefullly weighted to reflect quality of lending, exposure to market segments etc.  Mortgages aren't sold like cans of baked beans. Volume is controlled.

The cost to the lenders of Covid , in terms of additional operating costs, additional borrrowing costs , borrowers defaults,  tax raids by the Government is far from clear. Then there's the fact that to comply with Basle III banks are still having to strengthen their balance sheets. The impact of the GFC of 2006/08 still lingers on. 

A product fee is a product fee. Might as well overpay the mortgage if you've the cash spare. Then it's a guaranteed return. 

LTV is dependent on what happens to house prices. Banks are being fairly cautious with their view of 2021 for good reason. The mood could soon change. 

I'd ignore the factors you cannnot control and focus on those you can. Ultimately it's a personal decision as what term to fix for. If you wish to save interest shorten the mortgage term. 

mither_2

Thrugelmir said:

Sounds as you've justified the decision to yourself as to why a two year fix is preferable.  In the middle of a global pandemic I wouldn't say this is a lenders market. Risk is priced.  Mortgage books are carefullly weighted to reflect quality of lending, exposure to market segments etc.  Mortgages aren't sold like cans of baked beans. Volume is controlled.

The cost to the lenders of Covid , in terms of additional operating costs, additional borrrowing costs , borrowers defaults,  tax raids by the Government is far from clear. Then there's the fact that to comply with Basle III banks are still having to strengthen their balance sheets. The impact of the GFC of 2006/08 still lingers on. 

A product fee is a product fee. Might as well overpay the mortgage if you've the cash spare. Then it's a guaranteed return. 

LTV is dependent on what happens to house prices. Banks are being fairly cautious with their view of 2021 for good reason. The mood could soon change. 

I'd ignore the factors you cannnot control and focus on those you can. Ultimately it's a personal decision as what term to fix for. If you wish to save interest shorten the mortgage term. 

You're right - I have justified the decision to myself but I'm always interested to hear other views as there may be some risks I'd not considered. My natural inclination is that 5 years would be less risky but I don't think its the better option. 
The points you raise are good that there are a variety of factors in how banks price mortgages (alot more than I realise I'm sure) but the biggest risk as I see it is if interest rates increase significantly in the next two years and this seems unlikely to me if I have a 75%/60% LTV on a semi detached house in an OK part of London. 
The other risk I had considered in this approach is what if house prices drop significantly in the next 24 months and the overpayment I can make in 2 years time isn't sufficient to push me down to the 60% level or keep me at 75%. I've built in a margin of error to allow for this.  
Speaking to some of the finance people my company works with they expect global interest rates to stay lower for another 10 years but this doesn't necessarily have any bearing on the UK mortgage market. 

mither_2

MFWannabe said:

Because of b and e in your list I would say you’re better taking the 2 year option 

Agreed - when the money becomes available we may as well use it to reduce the mortgage. Deposit rates are so low there is minimal benefit in keeping money in them.
We could take the money once available and invest elsewhere to try and get a higher return but we don't know anything regarding shares or other investments etc 

mither_2

mither_2 said:

Thrugelmir said:

Sounds as you've justified the decision to yourself as to why a two year fix is preferable.  In the middle of a global pandemic I wouldn't say this is a lenders market. Risk is priced.  Mortgage books are carefullly weighted to reflect quality of lending, exposure to market segments etc.  Mortgages aren't sold like cans of baked beans. Volume is controlled.

The cost to the lenders of Covid , in terms of additional operating costs, additional borrrowing costs , borrowers defaults,  tax raids by the Government is far from clear. Then there's the fact that to comply with Basle III banks are still having to strengthen their balance sheets. The impact of the GFC of 2006/08 still lingers on. 

A product fee is a product fee. Might as well overpay the mortgage if you've the cash spare. Then it's a guaranteed return. 

LTV is dependent on what happens to house prices. Banks are being fairly cautious with their view of 2021 for good reason. The mood could soon change. 

I'd ignore the factors you cannnot control and focus on those you can. Ultimately it's a personal decision as what term to fix for. If you wish to save interest shorten the mortgage term. 

You're right - I have justified the decision to myself but I'm always interested to hear other views as there may be some risks I'd not considered. My natural inclination is that 5 years would be less risky but I don't think its the better option. 
The points you raise are good that there are a variety of factors in how banks price mortgages (alot more than I realise I'm sure) but the biggest risk as I see it is if interest rates increase significantly in the next two years and this seems unlikely to me if I have a 75%/60% LTV on a semi detached house in an OK part of London. 
The other risk I had considered in this approach is what if house prices drop significantly in the next 24 months and the overpayment I can make in 2 years time isn't sufficient to push me down to the 60% level or keep me at 75%. I've built in a margin of error to allow for this.  
Speaking to some of the finance people my company works with they expect global interest rates to stay lower for another 10 years but this doesn't necessarily have any bearing on the UK mortgage market. 

If the mood did change would that not be a good thing for those on a low LTV? If they valued the house higher it could be easier to get to 60% from 75% where we are currently. I've personally assumed that house prices will fall at least slightly. 

ak_83

mither_2 said:

Hi All,

Interested to hear different thoughts on this.
Our situation 
Offered a 75% mortgage by Barclays
Barclays were recommended to us as they are able to complete quickly so we can do so before the end of the SDLT holiday. 
£600k property
2 year fix = 1.57% vs 5 years = 1.70% (Barclays have since moved this up to 1.78% but we can keep the 1.70% rate as agreed before the change)  
£999 fee 
My preference is for a 2 year fix because:
a) I don't expect interest rates to rise significantly by Jan 2023 when the fix expires.
b) By 2023 we'll have additional funds available to reduce the mortgage and get to a 60% LTV and hopefully secure a lower rate (I have money in fized rate deposits which I can't draw out currently)
c) When borrowing a relatively large amount paying the £999 fee is less important than the interest rate and/or the potential to get onto a lower LTV later 
c) We'd like the flexibility to negotiate a new deal in two years
e) We don't necessarily know that we still want to be in the property in 5 years and so want the flexibility to move and take out a new mortgage (a 3-4 year deal would work well but there are relatively few good options available currently)   
f) It seems unlikely that the BoE base rate will be increased significantly in the next 24 months. If posters think it could/will increase then please explain why?  
g) It feels like a lender's market at the moment with so many people trying to buy ahead of the end of the SDLP holiday. Hopefully by January 2023 they will need to be more competitive. If we have a 75%/60% LTV then there should still be attractive terms available to us (any thoughts on this? As I understand it some lenders have increased their rates recently so that they are less attractive but can still secure lots of new business) 

My partner would prefer to go for a 5 year fix but the main advantage of this is that our repayments are fixed in the event that we both lost our jobs (unlikely that either of us will - there is always the risk however) or interest rates went up significantly but I don't see this happening in the next 24 months so we would get a similar or better deal in Jan 2023.   
Any thought/ideas welcome.
Thanks in advance 
  

You and I were in the same boat - considering the same Barclays products (2 year fix 1.57% vs 5 years), and I had the same justifications and reasons as you did (especially A, B. D, F), and went along with the 2 year fix which ends in Jan 2023. How I regret that decision now. 

I did manage to avoid the worst rates on the market by contacting Barclays in September and locking in 3.15% as part of their existing customer rate. Like you, I expected my LTV to fall below 60% which it did and allowed me to lock in the best 5 year rate available on the market. Despite that, I hate the fact that I didn't lock in a 5 year rate 2 years ago as my interest payments have doubled! :-(

We all expected a recession/downturn in the market following the pandemic, but who would have thought we'd have mass-inflation and an invasion into Ukraine causing shortages and a currency war!