Advice on a 2 years or 5 years fixed rate mortgage

lamialex

Hello everyone,

I am applying for my first mortgage with Halifax tomorrow and I can either chose a 2 years fixed rate mortgage of 1.79% or a 5 years fixed rate mortgage of 2.76%. My mortgage broker is advising me a 2 years but my friends are saying 5 years so I am very unsure now. With the rates predicted to go up next year, I'm enclined to say 5 years but at the same time it's £200 more each month of repayments. I intend to stay in this place for more than 2 years.
Thank you

getmore4less

LTV
Full term
planned Payment

lamialex

LTV is 90%
it's a repayment mortgage and the duration of the loan is 25 years 

gozaimasu

Of course the broker would say that because you have to pay them a fee each time you remortgage. Didn’t they explain the reason why they advised a 2 year term?

lamialex

haha yeah good point
mortgage broker was saying the risk that mortgage rates would go above 2.76% for us in 2 years was minimum, that we could get a better deal because of the equity we would have by then in the house

getmore4less

Run the numbers paying what you would on the 5y on the 2y and see where you are in 2y on LTV.

Then run that for 3 years to work out what rate would break even over the full 5 years.

It will be higher than 2.76%, your broker should know this.

If you pick the right lender you will do a product switch so broker bias is a bit of a red herring, many will do it for you free lender kickback is enough.

Halifax are not always that great second time round they may still penalise as the borrowing goes down.

How much are you borrowing?
what fees?
Any plans to overpay?
Is it the sort of property than might go up?

If you look at the rates for the different LTV and rates you can see how much lower you would be looking at rate rises starting from.

steampowered

Personally I would go for the 2 years, no question.

You have a very good chance of being able to remortgage at the 85% LTV band in 2 years, which will reduce your interest rate by a lot. Why would you want to lock in a high mortgage rate?

It is unlikely that interest rates will increase by >1% in the course of the next 2 years, in an era where the economy is recovering from COVID and the government is sitting on enormous public debt. It is extremely unlikely that they will increase by more than that.

Would your friends have been giving the same advice 2 years ago? 4 years ago? 6 years ago? People were fretting about interest rate rises then too; I am sure your friends would have given you exactly the same advice; they were wrong then and they are probably wrong now too. 

getmore4less

ask your friend what they think rates will be in two years.

for those two rates over 25years with a £200 difference in payment.

I get that to be a £416k  mortgage with £1721 or £1921 payment

given £200 is probably rounded  say from £190-£210 it could be +-£20k from that.

using £416.  (with and without  a \4999 fee on the  second switch if you take the 2y.)

Mortgage	£416,000
payment	£1,921	ERC/FEE
rate	1.79%	-£999
new rate	2.79%	£999
Time	Years	months
Left on current	0	24
New fix term	5	0
amount left after(months)		24
Start	rate	End
£416,000	1.79%	£384,247
£416,000	2.79%	£392,486
amount left after(months)		60
£416,000	1.79%	£334,437
£416,000	2.79%	£354,664
Switch after 2 years
Break even rate needed no fee and fee)		36
£384,247	3.564%	£354,666
£385,246	3.469%	£354,666

If you took the 2y you would be ~£8k up after 2 years and most likely at least 85% LTV.

That gives you a good amount of rate protection over the next 3years.

lamialex

Thanks for the replies

How much are you borrowing?

£494k deposit is £56k which includes fees of £999

Any plans to overpay?

no, we are planning to renovate the place

Is it the sort of property than might go up?

no idea, wish we would know... it's in north London

Typhoon2000

Taking the 2 yr fix but overpaying the £200 that you would have been paying had you gone for the 5yrs fix would put you in a good position in 2 yrs time.

Thrugelmir

lamialex said:

mortgage broker was saying the risk that mortgage rates would go above 2.76% for us in 2 years was minimum,

Broader money markets are pricing in a base rate of 1% by the end of 2022. That's why 5 year money is becoming more expensive now. As might finally be the start of the end of the cheap money era and a return to normality.