5 or 10 year fix?

AndyJR

Don't often post on these forums but really struggling to decide between two products. I know the situation is all a bit crystal ball and there is often no right answer, but any views appreciated.

Situation is we moved around 2 years ago and shortly after moving (ported mortgage over) we fixed for 2 years. This expires end of January and can now do a PT.

Original mortgage was £213,000. We've overpayed like mad the last year given the gathering clouds and balance is down to £157,700 (we're with First direct, which allow unlimited overpayments), trying to take advantage of being on our current 1.69% rate. The aim has been to try and make it so our minimum repayments stay more of less the same even with the rate increases, which we seem to have sort of managed. We have 29 years left on the term of the mortgage.

Now its crunch time in terms of product transfer I'm struggling to decide between a 5 year fix at 3.60% vs a 10 year fix at 3.9% (same product fee). What would you pick given the current financial climate? Lots of scary articles about SONIA swap rates going a bit crazy (I don't pretend to understand how these influence rates). Before I was set on a 5 year fix, but now not so sure. 

My theory is after 5 years I expect with overpayments we could get the loan down to nearer £100,000 (provided our incomes stays broadly the same), meaning even if rates go scary high it should still be manageable. 

MrCarrot

Same dilema here.  I could not decide between 5 years and 10 years.  The interest rate difference was similar to yours.

In the end, my strategy is to halve the balance in 5 years time.  On that basis, if interest rates double over the next 5 years, I'll be no worse off (in terms of payments).  The danger is if the cost of living increases and I don't manage to halve the balance.

The thing that put me off a 10 year fix is that historically I've paid off large chunks of the balance every 5 years.  To do the same with a 10 year fix would incur early repayment charges.  On my balance and deal I calculated these to be in the region of £1k - £2k (depending on how much I pay off), which when paying off £10k+ doesn't seem too bad, but it's still real money.

I went for the 5 year fix in the end.  10 years seemed like a long time.  I won't know if it was the right decision until another 5 years passes.  That's assuming I even get to move at this rate.

simon_or

Sounds to me like a 5 year fix would be better in your case.

With a fix ending in Jan, Is there any reason you didn't lock in a rate in late late July or early August or even earlier than that? Would've saved quite a bit compared to the rate you're getting now.

I have a BTL fix ending in May 2023 and my broker got me an offer with 6 months validity plus a 3 month extension so I've locked in a rate almost 9 months early. Unless rates go down between now and the end of the year, it's saved me thousands of pounds and peace of mind. She said there are even options which can be used to lock in a rate 11 months in advance.

jj_43

can't see a 3.6% with first direct is that still available?
The interest rates quoted already reflect expectations of future changes in the BoE rate. People often fix at the wrong times, when rates have already gone up often because they they are scared. Given your free cashflow why not look at a tracker and benefit from any falls in rates, if any, over the next 5 to 10 years. 

AndyJR

simon_or said:

Sounds to me like a 5 year fix would be better in your case.

With a fix ending in Jan, Is there any reason you didn't lock in a rate in late late July or early August or even earlier than that? Would've saved quite a bit compared to the rate you're getting now.

I have a BTL fix ending in May 2023 and my broker got me an offer with 6 months validity plus a 3 month extension so I've locked in a rate almost 9 months early. Unless rates go down between now and the end of the year, it's saved me thousands of pounds and peace of mind. She said there are even options which can be used to lock in a rate 11 months in advance.

Regarding locking in earlier we probably should have explored this more but when we did go to a few brokers at the end of July our unique situation indicated we would struggle to remortgage without going for more specialist products with less attractive interest rates. My partner very recently went self employeed. This had been great in terms of overpaying on the capital but raised issues in terms of being to take into account her income in terms of a remortgage. None of the products being offered seemed to have the same flexibility as FD in terms of unlimited overpayments. 

On reflecting we probably should have locked something in anyway to compare to the first direct product transfer. You live and learn. I first bought in 2013 so not used to the current scenario of chasing ever increasing interest rates!

AndyJR

jj_43 said:

can't see a 3.6% with first direct is that still available?
The interest rates quoted already reflect expectations of future changes in the BoE rate. People often fix at the wrong times, when rates have already gone up often because they they are scared. Given your free cashflow why not look at a tracker and benefit from any falls in rates, if any, over the next 5 to 10 years. 

The 3.6 for 5 years is under rates for existing customers (60 ltv). Is still on the website as of this morning (pdf at bottom of mortgage rates page). I sorted an offer on that rate switch product yesterday. Having a final think about my options before signing on the dotted line! 

AndyJR

MrCarrot said:

Same dilema here.  I could not decide between 5 years and 10 years.  The interest rate difference was similar to yours.

In the end, my strategy is to halve the balance in 5 years time.  On that basis, if interest rates double over the next 5 years, I'll be no worse off (in terms of payments).  The danger is if the cost of living increases and I don't manage to halve the balance.

The thing that put me off a 10 year fix is that historically I've paid off large chunks of the balance every 5 years.  To do the same with a 10 year fix would incur early repayment charges.  On my balance and deal I calculated these to be in the region of £1k - £2k (depending on how much I pay off), which when paying off £10k+ doesn't seem too bad, but it's still real money.

I went for the 5 year fix in the end.  10 years seemed like a long time.  I won't know if it was the right decision until another 5 years passes.  That's assuming I even get to move at this rate.

Thanks, that's reassuring. My thought process is the same. Try and have a laser focus on bringing down the capital both before the rate switch in January and over the 5 years, to protect against where interest rates might be in 5 years. I suppose overpaying before rate switch maybe particularly beneficial in reducing the ERC, giving me options in say year 3 onwards if rates drop to 1% or below again (first directs ERC is 3% of loan at point of rate switch for first year, but then drops to 2% for remaining years).

So much to think about in terms of scenarios!

What rate did you manage to get for a 5 year fix, if you don't mind me asking?

[Deleted User]

A lot can change in a decade, and in 5 years. Five years ago, we were still a good 2 years away from knowing what COVID was! I am also looking into mortgages and 5 years seems like a good amount of time to ride out any predicted crashes.

Of course, we don't know for sure what will happen but 5 years (as opposed to 2 years, at least) seems to be a reasonable amount of time to commit to, and may also introduce the possibility of rates falling at the end of the term - who knows? It is very difficult to make such long term decisions based on a small amount of information, but I'm basing it on the probability of a crash and interest rate rises in the next 1+ years.

AndyJR

Thanks all, really useful feedback and perspectives. Think I'll opt for a 5 year fix given circumstances. 

Toonartist

I was faced with the same option, 5 or 10yr. It's been a while but I did used to be a large loan underwriter, credit risk analyst so I tried to apply my logic head again from back then. That's not to say this is right or wrong, just a train of thought that helps clear the clouds of confusion (for me anyway).

Situation. Currently on a standard variable rate of BoE +2%. We've been on this for about 10 years now as any discounts would result in in us starting on the remortgage / re-fix train again with the additional fees etc.

This last week or so forced a decision to be made. Historically, in the last 300yrs the UK has witnessed one, that's right, one occasion in which BoE interest rates dropped below 2%. That was of course after the Financial crisis + covid pushing it to the absolute minimum.

Before the 2007/08 banking crisis and back to the 1950's, we'd only briefly reached 4% on a couple of occasions and then there was a spell at 2% in the mid 1930s through WW2. I do have painful memories of the early 1990s were we reached 15%. My time at the bank seen interest rates of between 5-8% (until the crash of 2007). 

Remember, what happened in the past is the past and is not always an indicator as to what will happen. But it does give you an idea as to how unusual it has been for the last 10-15 years.

So, if I was top take that 2% BoE tracker and apply it to the lowest interest rates have ever been before the 2007 financial crisis, it would result in a 4% interest. My two options were 5yr at 3.69% or 10 years at 3.79%. BoE interest rates would need to drop below 1.69% for a long spell for me to be worse off.

My heart was saying stay with the BoE + 2% but the head says once interest rates rise to 4% or over, the chances of dropping below 2% again become unlikely as any large drops will likely overheat the economy. My gut feeling is we were returning to a more normal state of BoE rates between 4-7%, which is what it's done through most of it's history and makes it easier to control the economy via interest rate adjustments. Remember, this is just my guess and not fact. Just putting it out there so others can use it as a starting point for their own decision making process.

In the end I took the 10 yr option in the end. This will leave me with 10yrs left after that fix ends and with only a small balance left. 

caprikid1

If 5 & 10 year deals are priced the same then the expectation is rates will come back down in the medium term. Personally I think you have missed the boat on 10 year fixed, my broker was even suggesting a 3yr but I wanted more certainty but I fixed over a month ago now at far better rates.

The rate rises are a bit of a curve so the higher up you are in the curve the shorter time you should fix for.

All of that said, if you can comfortably afford a 5 year rate, go for a 5 year and overpay then whatever happens you will be ok