Drop in interest rates in 3-5 years

SmallTownGirl_3

We're due to fix into another deal with our mortgage and currently live in our home which we will now be in for the foreseeable future to have a family in, got the option to either go for a 5 year fixed at 4.29% or go for a 3 year fixed which is more over the 4.5% and an extra £38 a month on the 5 year amount, but wondering in 3 years is the likelihood that the rate will drop again? What would you advise is best?

aoleks

not financial advice

there is an expectation that rates will drop again. inflation will, relatively shortly, go back to normal levels, which means the baseline rate will follow. there is also a second scenario, in which something really bad happens (banking crash, recession), in which rates will simply crash and go back to under 1%, as they were since 2008.

if you want stability, I think the £38/extra a month are a no brainer, that's literally 2 kebabs. should rates plummet, you will be able to remortgage and those several thousands you pay in ERCs will be less than the saving. should rates go down by a bit, it won't make much of a difference anyway and should rates go up (a little or a lot), you'll be safe and sound at the "lowest" rate available for 5 years.

ACG

I am never right with these things, but I think rates will come down within 12-18 months. 
Please nobody repost this in 12-18 months showing me I am wrong haha - I already know I will be. 

Penguin_

aoleks said:

not financial advice

there is an expectation that rates will drop again. inflation will, relatively shortly, go back to normal levels, which means the baseline rate will follow. there is also a second scenario, in which something really bad happens (banking crash, recession), in which rates will simply crash and go back to under 1%, as they were since 2008.

if you want stability, I think the £38/extra a month are a no brainer, that's literally 2 kebabs. should rates plummet, you will be able to remortgage and those several thousands you pay in ERCs will be less than the saving. should rates go down by a bit, it won't make much of a difference anyway and should rates go up (a little or a lot), you'll be safe and sound at the "lowest" rate available for 5 years.

Crikey, how much are kebabs with you? That would get me 4 kebabs & probably some chips!! 

aoleks

I'm talking a nice, large one, shish, salad, chips, extra pita... haha

JM68

Worth bearing in mind the very low interest rates after 2008 were supposed to be an 'emergency response' to the Great Financial Crisis, but then stayed with us for may years after that.

Some people may have an 'expectation' that they will be lower again once inflation is lower but the financial markets seem to be pricing these interest rate rises (which also happening in the US and EU) as more of a 'return to the norm', with some further rates rises by summer priced in.

Nobody has a crystal ball and fixing (and for how long) is always a bit of a gamble, and often varies according to personal circumstances.

Both the 3-year and 5-year rates you have quoted are very good by historic standards.

Strummer22

aoleks said:

I'm talking a nice, large one, shish, salad, chips, extra pita... haha

Even so, a £19 kebab is taking the pish. Add that to the inflation-calc 'shopping basket' and we're all doomed!

wheldcj

As someone mentioned above, the ultra low rates were a response to a calamitous financial situation and afterwards the difficulties cause by brexit.  I believe that had we not had Covid, Brexit being finalised so to speak in 2020 would have probably seen a move from the BOE to edge rates up over a period of a couple of years.

Unless there is another banking collapse, a severe recession, or significant deflation I myself can't see the BOE having an appetite to bring rates back down sub 1.5%.  I think they will go down at some point in the next 2-3 years to stimulate some growth but not that much imho.   I am pro 5 year + fixed simply because they offer certainty and also because you have to factor in the applications fees and general hassle of a 2 or 3 year fixed.

mi-key

SmallTownGirl_3 said:

We're due to fix into another deal with our mortgage and currently live in our home which we will now be in for the foreseeable future to have a family in, got the option to either go for a 5 year fixed at 4.29% or go for a 3 year fixed which is more over the 4.5% and an extra £38 a month on the 5 year amount, but wondering in 3 years is the likelihood that the rate will drop again? What would you advise is best?

Look for a good long term fix ( 5 years + ) that doesnt have an early repayment charge ( or has a minimal one ). This way you get the best of both worlds as you are covered if rates do go up, but if they start dropping a lot then you have the option of remortgaging without a penalty.

ZeroSum

Market expectations are that they'll remain 4%+ until late 2025. 

2 & 3 year fixes have higher rates than 5 year fixes. So if the markets are correct, then paying more now & less in 3 years time or if fixing for 5 years, you're effectively paying less now & more in years 4&5. Both will more or less average out to similar amounts.

If you've got a decent LTV, you can get a lower mortgage rate to what other banks are paying on savings fixes. So it's something to consider to do instead of overpaying 

dunstonh

there is an expectation that rates will drop again. inflation will, relatively shortly, go back to normal levels, which means the baseline rate will follow.

It is worth noting that normal levels means an interest closer to 7%.    The post credit crunch low rates are a historic anomaly.  Sooner or later the trend has to be upwards.  It will probably zig zag its way back there in time.