Choosing between a 2, 3 or 5-year fixed FTB Mortgage right now?

rystaman

Hi all, apologies in advance as this is fairly long. Me and my partner have had an offer accepted on our first home for £228,000 and we’re in the middle of looking at mortgages but I’m tearing my hair out right now with what’s going to be the best deal for us after going through 3 internet brokers and some advice from one at the estate agents there’s not really any “special broker deals” right now. 

Some background, we’re looking at a 30 year, 85% LTV mortgage and it’s a house we’d be looking to stay in for the foreseeable (7+ years at least). The house needs some work doing in regards to modernisation and we’ve budgeted around £10,000 for immediate jobs including some re-plastering, carpeting, painting, and a new bathroom fitted which we do have to hand but it wipes out our savings apart from our 6-month emergency fund.

The 2-year fixed mortgage that has been recommended by Trussle and Habito is:

HSBC - 2.64% fixed with £999 product fee - £779.93 a month

There is also a Nationwide - 2.79% mortgage with the same fee and with £500 cash back but works out at the end of the two years to be around £200 more expensive and leaves us at a lower LTV.

Over the two years with 10% overpayment, it’d put us needing to put in an extra £774 on top of the £1,871.73 in overpayments to drop to 80% LTV. 

Then looking at a remortgage calculator (using today’s rates) we’d be looking at around 1.88% fixed for 2 years (with a £999 fee) for years 3+4 which would leave us at 75.57% LTV or £172,310 remaining. So we’d then have to put £1,310 into the next deal to drop us to 75% LTV.

I’m slightly concerned the two-year deal would over-leverage us in terms of having to stretch to overpay and put towards the remortgage at the end of the fixed period. I know you can’t predict what is going to happen in the future but I know we haven’t seen the full effects of leaving the EU or Covid yet so I don’t know how negatively that is going to affect us but I’d rather not be stretched to my limit which is the thing that concerns me.

The 3-year fixed deal that I’ve seen is:

Nottingham - 2.9% fixed with no fee - £807 a month

At the end of the 3 years, it puts us at £181,091.61 or 79.43% LTV which means we don’t have to overpay or put anything towards the remortgage in equity. And using the same figures as above at the end of the 5th year we’d be at 74.86% LTV. It also doesn’t over-leverage us in terms of having to put an extra £2,645 towards the mortgage and allows us to have that liquid for an emergency or for any further work on the house as the first couple of years is going to be the time we do the most work.

And finally, the 5-year fixed deal is:

Nationwide - 2.94% fixed with £999 fee (£500 cashback) - £811 a month

My only concern with this is that locking in for 5 years on what isn’t the best rate could be counter-productive in the long term. And at the end of the 5 years leaves us at 75.49% LTV meaning we’d have to put £1,111.40 in equity towards a lower LTV band.

All the future assumptions above are based on our house price staying the same which I know there are some diametrically opposed predictions for the next few years but I’m just tempering my expectations and also the remortgage rates of today.

I’m leaning towards the 3-year fixed deal at Nottingham right now but as a FTB I’d really love to get some opinions on other people’s personal experiences and to see if I’m missing anything glaringly obvious as I’ve been looking at this for hours…

ukri

Youve talked to 3 brokers and now have the 3 best rates for a 2, 3 and 5 year fix, with very little difference in monthly payments.

It looks like your quandary boils down to the term.

Looking at what you have said, a 3 year term seems most appropriate for you. I think 85% rates are quite high at the moment and wouldn't be comfortable fixing for 5 years as I would rather remortgage to a lower LTV at year 2 or 3.

rystaman

ukri said:

Youve talked to 3 brokers and now have the 3 best rates for a 2, 3 and 5 year fix, with very little difference in monthly payments.

It looks like your quandary boils down to the term.

Looking at what you have said, a 3 year term seems most appropriate for you. I think 85% rates are quite high at the moment and wouldn't be comfortable fixing for 5 years as I would rather remortgage to a lower LTV at year 2 or 3.

Pretty much, I think I've discounted the Nationwide 5-year rate solely to it being a bad rate and we've got a relatively high LTV. I think the issue is that for the HSBC 2-year rate we'd have to stump up £2,695 at the end to move down to the 80% LTV band (this is with the assumption that house prices stay the same), and with the work that we want to do on the house alongside our savings I think it might overstretch us, especially with the effects of Brexit and Covid yet to be fully seen. 

Looking at the 3-year fixed rate with Nottingham after the 3 years it puts us already under that 80% LTV threshold (albeit a year later). I know in the longer term it won't make too much of a difference, but in the short term it could make a difference in terms of the work we want to do on the house and just staying a little bit more liquid in case anything does happen.

I'm not missing anything major here am I if I went for the 3-year fixed over the 2-year?

clueless_but_curious

Well done on doing your maths so thoroughly.  I thought I was the only one that had made a spreadsheet to work all of this stuff out with a few inputs!
My humble view is that your interest rate is incredibly high and your priority should be to get that down.  If you successfully spend two years without missing a payment, you will unlock more attractive rates (and I note you have attempted to scenario plan this).  
I don't think being in the 80% ltv 'band' will help you enjoy much of a step down in rates - simply making all payments on time and building your credit score (and maybe a couple of small salary increases) will take care of that for you.  Your target should be the 75% ltv threshold.  
My own view would be to fix for two years.  At the end of y2, remortgage and adjust your term down to whatever will leave you at 75% ltv at the end of y4.   
I would also add that your overpayments will make a trivial difference to your financial position.  At the end of y2, having made all overpayments you will have saved yourself £50 in interest.  I would rather have my £1800 in the bank for a boiler replacement!

clueless_but_curious

I'll just declare my position.  I'm due to be at 79.5% at the end of my 2yr fix and my plan is to pay a lump sum, if my financial position allows, to 75%.  I got my broker to give me the current rates at both intervals, and it was clear that getting to 75% is the absolute priority 

Thrugelmir

As always it's a gamble. The shorter the fix term you chose. The greater the risk that property prices might fall and/or that interest rates will rise. Lower initial outgoing but uncertainty as to the future. With a longer fix you get peace of mind. 

Switching lenders i.e. remortgaging will potentially add another layer of costs. Something else that needs to be factored in. 

There's no right or wrong answer. Whatever suits you best. 

IAMIAM

In this instance, HSBC are a good lender for existing and new customers, they are always top of the tables.
As are Nationwide. They tend to be the two that compete with each other with rates, you will notice they sit side by side on most comparison league tables! I'd go for HSBC