Fix for 2 or 5 years

mallen

I’m buying a property on my own. Looking at two options at 95% LTV which will leave me a bigger amount of equity to invest further. 

2 year fixed rate at 5.69% = £1398pm 
interest over 2 years = £27800
capital over 2 years = £5760

then in 2 years look to get a rate of around 3.5% 

3 year fixed rate at 3.5%

£1084pm
interest over 3 years = £24607
capital over 3 years = £14387

Total 2/3 year estimate 
interest = £52407
capital = £20152

or 

fix for 5 years at 4.89%
£1274pm 
interest over 5 years = £55233
capital over 5 years = £17165

So from my estimates taking a 5 year fixed deal now would mean 
£2986 less capital paid 
£2826 more interest paid 

This is all based on being able to secure a mortgage for 3.5% or so in 2 years time. 

Not sure if it is just better to fix for the 5 year for peace of mind or is 4.89% a crazy rate to be fixing for 5 years at? 

Edi81

No one knows where rates will be in 2 years time. Two years ago no one thought rates would be where they currently are. 

You may win you may lose. 

K_S

@mallen If you accept that you can't predict future mortgage rates then the decision on how long to fix should be based on your personal financial circumstances (eg: would you be able to absorb a further hike in rates in 2 years time if that were the case, what would happen if you weren't able to re-mortgage if house prices went down from here causing you to go above 95% LTV in 2 years), attitude towards risk (what will cause you less regret - fixing for 2 years and then seeing rates stay the same or go up further, or fixing for 5 years and seeing rates dip within those 5 years), etc.

This blog by Martin Lewis discusses the difference between a good decision and a good outcome, might be worth a read
https://www.moneysavingexpert.com/news/2015/02/the-secret-to-avoiding-bad-financial-decisions/ 

"A real-life example is those who fixed their mortgages in the months just before interest rates started their rapid plummet. If the reason for fixing was to lock in for the peace of mind of a set rate rather than risk market variance, it was a good decision, just a bad outcome. Many will say "they should've seen it coming", but that's prescience after the fact. There was no, nor is there ever, way to truly know what would happen."

mallen said:

I’m buying a property on my own. Looking at two options at 95% LTV which will leave me a bigger amount of equity to invest further. 

2 year fixed rate at 5.69% = £1398pm 
interest over 2 years = £27800
capital over 2 years = £5760

then in 2 years look to get a rate of around 3.5% 

3 year fixed rate at 3.5%

£1084pm
interest over 3 years = £24607
capital over 3 years = £14387

Total 2/3 year estimate 
interest = £52407
capital = £20152

or 

fix for 5 years at 4.89%
£1274pm 
interest over 5 years = £55233
capital over 5 years = £17165

So from my estimates taking a 5 year fixed deal now would mean 
£2986 less capital paid 
£2826 more interest paid 

This is all based on being able to secure a mortgage for 3.5% or so in 2 years time. 

Not sure if it is just better to fix for the 5 year for peace of mind or is 4.89% a crazy rate to be fixing for 5 years at? 

weddingringman

Edi81 said:

No one knows where rates will be in 2 years time. Two years ago no one thought rates would be where they currently are. 

You may win you may lose. 

I think have know for two years that we’d be in this position in 2023. Brexit, inactivity due to covid coupled with eye watering inflation-inducing borrowing. We’ve been behind the curve on rate rises which were pitiful. 

I think the situation is clear. Typical mortgage rates of 4-6% are here to stay for higher LTVs. Could we see 7% for 90-95% LTVs? Possibly. Similarly we could begin to see rates for those with lower LTVs fall below 4%, or closer to 3% in a couple of years time. 

But to answer the OP , it sounds like you’re in a higher LTV banding so you easily be fixing again for more than 5.69% in two years time.  

My gut feeling is you’d have to have less than 60% LTV to get 3.5% in two years time, or to possibly even get under 4%. These higher rates are here to stay. 

Edi81

weddingringman said:

Edi81 said:

No one knows where rates will be in 2 years time. Two years ago no one thought rates would be where they currently are. 

You may win you may lose. 

I think have know for two years that we’d be in this position in 2023. Brexit, inactivity due to covid coupled with eye watering inflation-inducing borrowing. We’ve been behind the curve on rate rises which were pitiful. 

I think the situation is clear. Typical mortgage rates of 4-6% are here to stay for higher LTVs. Could we see 7% for 90-95% LTVs? Possibly. Similarly we could begin to see rates for those with lower LTVs fall below 4%, or closer to 3% in a couple of years time. 

But to answer the OP , it sounds like you’re in a higher LTV banding so you easily be fixing again for more than 5.69% in two years time.  

My gut feeling is you’d have to have less than 60% LTV to get 3.5% in two years time, or to possibly even get under 4%. These higher rates are here to stay. 

We expected rate increase but no where near as much. Combine that with the market being all over the place and in my view taking a 2 year fix is a huge gamble at the moment. 

simon_or

It's exactly as EDI and KS said, it could be higher/lower/same in 2 years, no one knows. I wouldn't base my decision on my opinions about where rates will be or predictions from "forecasters" in the media or other public forums.

Personally, I don't handle long term fixes well and my finances and spending habits are such that I can work around jumps in interest rate so I've always gone for 2 year fixes since my first many years ago.

It worked out beneficially for some time and adversely in the recent past but I intend to stick to it as that's what works with my nature and my finances.

Even so, at 95% LTV it's also important to think about house values dropping. If your LTV goes above 95% then you'll be stuck with your own lender. Best case scenario they will have a 100% LTV product for existing customers, worst case scenario you'll drop on to a horrendous SVR rate.

At least with a 5 year fix you have some time to build some equity, make overpayments, etc. so there's less chance of you being trapped.

Zoe02

Depends on your risk apetitie.

If you want certainty then 5 years but if up for a risk then 2 years and see where things are in 2 years time.

BikingBud

mallen said:

I’m buying a property on my own. Looking at two options at 95% LTV which will leave me a bigger amount of equity to invest further. 

2 year fixed rate at 5.69% = £1398pm 
interest over 2 years = £27800
capital over 2 years = £5760

then in 2 years look to get a rate of around 3.5% 

3 year fixed rate at 3.5%

£1084pm
interest over 3 years = £24607
capital over 3 years = £14387

Total 2/3 year estimate 
interest = £52407
capital = £20152

or 

fix for 5 years at 4.89%
£1274pm 
interest over 5 years = £55233
capital over 5 years = £17165

So from my estimates taking a 5 year fixed deal now would mean 
£2986 less capital paid 
£2826 more interest paid 

This is all based on being able to secure a mortgage for 3.5% or so in 2 years time. 

Not sure if it is just better to fix for the 5 year for peace of mind or is 4.89% a crazy rate to be fixing for 5 years at? 

Where's the other half of your analysis? 

You must apply some sensitivity analysis. What happens if the interest rates go to 6% or 8%

If you only make a decision based on a hope that interest rates may fall back to 3.5% then you may be very surprised, disappointed and hard pressed.

weddingringman

Edi81 said:

weddingringman said:

Edi81 said:

No one knows where rates will be in 2 years time. Two years ago no one thought rates would be where they currently are. 

You may win you may lose. 

I think have know for two years that we’d be in this position in 2023. Brexit, inactivity due to covid coupled with eye watering inflation-inducing borrowing. We’ve been behind the curve on rate rises which were pitiful. 

I think the situation is clear. Typical mortgage rates of 4-6% are here to stay for higher LTVs. Could we see 7% for 90-95% LTVs? Possibly. Similarly we could begin to see rates for those with lower LTVs fall below 4%, or closer to 3% in a couple of years time. 

But to answer the OP , it sounds like you’re in a higher LTV banding so you easily be fixing again for more than 5.69% in two years time.  

My gut feeling is you’d have to have less than 60% LTV to get 3.5% in two years time, or to possibly even get under 4%. These higher rates are here to stay. 

We expected rate increase but no where near as much. Combine that with the market being all over the place and in my view taking a 2 year fix is a huge gamble at the moment. 

We took a 5 year fix of 3% that was initiated around October 2022.

Im kicking myself because I must admit I wasn’t aware you could get your new deal as early as 6 months in advance. I waited till ours was due to end in around 6 weeks.

I suspect I could’ve gotten something a fraction south of 3% had I moved quicker. 

simon_or

weddingringman said:

Edi81 said:

weddingringman said:

Edi81 said:

No one knows where rates will be in 2 years time. Two years ago no one thought rates would be where they currently are. 

You may win you may lose. 

I think have know for two years that we’d be in this position in 2023. Brexit, inactivity due to covid coupled with eye watering inflation-inducing borrowing. We’ve been behind the curve on rate rises which were pitiful. 

I think the situation is clear. Typical mortgage rates of 4-6% are here to stay for higher LTVs. Could we see 7% for 90-95% LTVs? Possibly. Similarly we could begin to see rates for those with lower LTVs fall below 4%, or closer to 3% in a couple of years time. 

But to answer the OP , it sounds like you’re in a higher LTV banding so you easily be fixing again for more than 5.69% in two years time.  

My gut feeling is you’d have to have less than 60% LTV to get 3.5% in two years time, or to possibly even get under 4%. These higher rates are here to stay. 

We expected rate increase but no where near as much. Combine that with the market being all over the place and in my view taking a 2 year fix is a huge gamble at the moment. 

We took a 5 year fix of 3% that was initiated around October 2022.

Im kicking myself because I must admit I wasn’t aware you could get your new deal as early as 6 months in advance. I waited till ours was due to end in around 6 weeks.

I suspect I could’ve gotten something a fraction south of 3% had I moved quicker. 

Not a fraction south of 3%, you could've done much better than that.

There are banks that allow you to extend the initial 6 months mortgage offer by 1, 3, 6 months on top so in effect you could have booked a rate much earlier in the year when they were down in the pits. Great for hedging your bets. I'll admit, I only know this because of my broker.