3 yr @ 1.75% or 5yr @ 2.34%?

bensebborn

Our mortgage ends it's current fix in September, so we arranged a mortgage offer earlier this year and have a mortgage offer agreed at 1.75% for a 3 year fix. (We have a few unique things with the house so I realise there may be some cheaper deals, but we were restricted to certain lenders).

Since then, the BoE base rate has gone up and generally the economy doesnt look great. We're just wondering if we should move to a 5 year fix instead, but this would be on the 'new' rates at 2.34% if we did so.

We're comfortable and can pay the increase if things went up in 3 years once the fix ended, but really just looking at the best deal overall.

My quick maths suggests we'd be better off on the 5 year fix, if the new mortgage we take in 3 years time was 3.25% or higher (so approx 0.9% higher than now) - which seems quite possible?

K_S

@bensebborn I don't have any advice to give on your core question, but well done for getting the mortgage offer sorted well in time. I see plenty of people with fixes ending in a few months who could have secured a rate 5-6 before the end of the fix but didn't realise that you could do it that early.

penners324

There's already media pressure on the Bank of England to not raise interest rates anymore.

This can quickly become government pressure.

A lot can happen in 3 years.  

What if mortgage rates we're below 1% again in the 3 years? 

dimbo61

I would take the 3 year deal at 1.75% and overpay every month like you were on the 5 year rate of 2.34%.
So check what the difference in the payments are and set your DD to the more expensive rate.
What LTV bracket will you be in 3 or 5 years ?

bensebborn

Yeah I’m swaying towards the lower rate/shorter fix. Reading today there’s a few academics saying the interest rate is unlikely to go to 2% due to its effect on growth. 

We’re already about 55% LTV so don’t think that will make much difference but yes absolutely could overpay a bit to reduce the outstanding capital and reduce the effect of any future rate rise. 

mrsammyp

Without know the figures it's difficult to know what this difference in interest rate would mean to you overall and during the term. I would put both into the mortgage calculator and see how it looks, also as dimbo61 has said, see what it would mean to your overall balance if you overpaid the difference. 

bensebborn

It makes about £100 a difference if we go with the higher rate from day one (Plus less remortgage fees if doing 5 vs 3 year)
After 3 years if the BoE interest rate is say 2% then the monthly payment would be +£400/month.

So looking at a 5 year period

Fixing at higher rate: £100/month x 5 years.
Or fixing lower for 3 years, but then if it had jumped +1% when we remortgage, +£400/month x 2 years+

Overpaying by the £100/month for the first 3 years only reduced monthly payments by about £20/month so not really worthwhile in the grand scheme.

In a nutshell, break even works out if the interest base rate is 2% or more in Q4 2025. Which is the difficult question! It's a long time away, people are predicting 2% within a year, and 2% is also below the average rate we've been at historically. But then again the economy isn't great so can't see them keeping it higher than needed.

TonyTeacake

bensebborn said:

It makes about £100 a difference if we go with the higher rate from day one (Plus less remortgage fees if doing 5 vs 3 year)
After 3 years if the BoE interest rate is say 2% then the monthly payment would be +£400/month.

So looking at a 5 year period

Fixing at higher rate: £100/month x 5 years.
Or fixing lower for 3 years, but then if it had jumped +1% when we remortgage, +£400/month x 2 years+

Overpaying by the £100/month for the first 3 years only reduced monthly payments by about £20/month so not really worthwhile in the grand scheme.

In a nutshell, break even works out if the interest base rate is 2% or more in Q4 2025. Which is the difficult question! It's a long time away, people are predicting 2% within a year, and 2% is also below the average rate we've been at historically. But then again the economy isn't great so can't see them keeping it higher than needed.

I would go for the 5 year fixed if you know it won't stretch you, at least you have peace of mind.

I do believe with this inflation monster on us the BOE will raise interest rates much higher than expected and they know it. If you watched Andrew Bailey on the news the other day he is now realizing it is a lot worse than he expected, they are now starting to panic.

I was talking about inflation on here months ago and how it will damage the economy and cause interest rates to rise.

The next couple of years is going to be really tough as inflation gets worse and deepens.

Also, it looks like we are heading for stagflation, rampant inflation, and a major recession with high unemployment.

I do believe this inflation monster will be with us for many years and will not be going away overnight.

We have had ultra low interest rates for over 10 years now and I'm certain we won't see them this low again for a long time.

I don't want to scare you but this is the reality

Thrugelmir

penners324 said:

There's already media pressure on the Bank of England to not raise interest rates anymore.

The media fortunately aren't empowered to manage the economy. Inflation needs to be tamed. 

Forecasts for the USA are suggesting a rate of 2.75% - 3% by the end of 2022.  An indication of the pressures that Central Banks globally face. 

nicknameless

TonyTeacake said:

bensebborn said:

It makes about £100 a difference if we go with the higher rate from day one (Plus less remortgage fees if doing 5 vs 3 year)
After 3 years if the BoE interest rate is say 2% then the monthly payment would be +£400/month.

So looking at a 5 year period

Fixing at higher rate: £100/month x 5 years.
Or fixing lower for 3 years, but then if it had jumped +1% when we remortgage, +£400/month x 2 years+

Overpaying by the £100/month for the first 3 years only reduced monthly payments by about £20/month so not really worthwhile in the grand scheme.

In a nutshell, break even works out if the interest base rate is 2% or more in Q4 2025. Which is the difficult question! It's a long time away, people are predicting 2% within a year, and 2% is also below the average rate we've been at historically. But then again the economy isn't great so can't see them keeping it higher than needed.

I would go for the 5 year fixed if you know it won't stretch you, at least you have peace of mind.

I do believe with this inflation monster on us the BOE will raise interest rates much higher than expected and they know it. If you watched Andrew Bailey on the news the other day he is now realizing it is a lot worse than he expected, they are now starting to panic.

I was talking about inflation on here months ago and how it will damage the economy and cause interest rates to rise.

The next couple of years is going to be really tough as inflation gets worse and deepens.

Also, it looks like we are heading for stagflation, rampant inflation, and a major recession with high unemployment.

I do believe this inflation monster will be with us for many years and will not be going away overnight.

We have had ultra low interest rates for over 10 years now and I'm certain we won't see them this low again for a long time.

I don't want to scare you but this is the reality

Thanks nostradamus