2yr vs 5yr fix at current rates?

fergie_

I'm in almost the exactly the same position as the original poster. I also got caught by them raising rates by near enough a point just before I was eligible to switch. In hindsight, I should have paid the penalty in May or even 18m ago to switch a couple of years early. 

However the expectation at the time was mortgage rates would rise then fall back again - as they started to in May until inflation got sticky.

I'm swaying more toward the 5y as I would be paying 0.55 points extra for 2y and could then find myself on an even higher rate. So to be better off, rates would then need to fall by at least a whole point by the time 2y is up.

The tracker is also an option as you have the option to jump with no penalty after 3m, but not good if rates keep going up and up.

My hope is things change for the better by xmas, but I'm hedging my bets by fixing for 5, just in case. Either way, I will be clearing what I can in advance. The era of 'cheap' money seems to be over.

I should add that I'd also look at 3y fixes, but they aren't offered by my lender.

michaels

Edi81 said:

So many variables at the moment. 

Do you expect to stay in your house for more than 2 years?
market is pricing rates not coming down for 5 years but no one has a crystal ball. If we did then we’d all be financial traders making lots of money!

Well a tiny bit, average to  2 years is 5.4%, average to 5 years is 4.8 which makes years 3-5 average 4.4%.I chose a 2 year fix a month ago hoping to catch falling rates in two years time, now it looks like the 5 year would have been the win.

Edi81

michaels said:

Edi81 said:

So many variables at the moment. 

Do you expect to stay in your house for more than 2 years?
market is pricing rates not coming down for 5 years but no one has a crystal ball. If we did then we’d all be financial traders making lots of money!

Well a tiny bit, average to  2 years is 5.4%, average to 5 years is 4.8 which makes years 3-5 average 4.4%.I chose a 2 year fix a month ago hoping to catch falling rates in two years time, now it looks like the 5 year would have been the win.

Sorry when I said markets I meant the swap markets which is what lenders use to lock in their cost. These are now over 6% for two years. 

The lenders are not passing the rate rises to savers and are using it to subsidise mortgages imho. 

simon_or

For a loan size under 100k, I personally would take out the 2 year fix and then direct some part of my surplus funds towards overpaying.

But that's just my personal aversion to signing up to long contracts with high exit penalties and the flexibility to absorb the downside (or reduce the mortgage significantly) if rates stay the same or go higher in 2 years time when the fix ends.

For next time, put a reminder to check in 8-9 months before the end of your fix. You could have reserved a Nationwide fix cost free back in May by doing a decision in principle, sat on it until the 6 month mark and then reassessed your options.

BikingBud

ElwoodBlues said:

Sarah1Mitty2 said:

ElwoodBlues said:

Crystal ball time for me - my current fixed rate expires at the end of Dec, lender now allowing me to pick a new fix to follow from it. I'm inclined to pick and lock something in asap as I suspect rates will be going higher over the next 6 months. But I'm trying to decide between a 2yr fix or a 5yr. What are the predictions for 2.5yrs from now?

Rates offered are 6.24% for 2 yrs vs 5.69% for 5 years. That works out to about £35/month extra on the 2yr fix. Natwest have changed their ERC's so they're no longer linear on the 5yr product - so even in the 3rd year of the mortgage the ERC is still 4%. Sneaky, but clever of them, because it deters borrowers from chopping out of their 5 yr fix in the middle of it. I'm fortunate that my mortgage balance is less than 100k, and I have savings available to make a lump sum overpayment before the new fixed rate hits, but even so, I'm looking at an extra £150 to £200 a month of interest. I can afford it, but the thought of the bank making an extra £60k out of me over the remainder of my mortgage is a bit sickening.

On the one hand I don't want to be locked in at 5.7% for 5 years if rates are lower than that in a couple of years. On the other, don't want to take the shorter fix and pay more now, only to find rates at the end of 2025 are just as high as current (or even higher - that, I think, is fairly unlikely).

Be interested to hear what other people's crystal balls are telling them?

Fix for five and clear the debt, don`t try to predict rates, that is how so many people who bought a couple of years ago got caught out, but to be fair betting rates would go down from where they were was always going to be a far out call! I don`t think central banks will be cutting rates below 5% any time soon.

That's exactly what I have been doing so far. 5 years ago I fixed at 2.5%, thinking they couldn't really go lower, but a couple of years later my lender was offering 0.8%.

I've no expectation that rates will drop back to recent historic levels, but there's clearly potential for them to reduce from current in 2 or 3 years from now? I don't think the current rates are sustainable long term?

And there is plenty of scope for them to remain around the long term average, or even higher. 

Affordability decisions based on limited sensitivity analysis and reality at time of purchase are now coming home to roost. 

Since the irreversible decision to overpay for the house commits you for the life of the mortgage I would always now aim to ensure that I could afford payments going forward, this protects you even if there is some scope for rates dropping. 

But clearly all those people that always thought that property prices would always go up and rates would remain low know better

bamgbost

As many have said, its difficult to suggest which is best as hindsight is a wonderful thing!

We went for 5 years 2 months ago. And all being well n good looks like a good decision. 4.09% with Halifax from Nov.
Now Halifax has effectively priced themselves out the market at  circa 6% for both 2 & 5 year options

In terms of medium to long term, rates are never getting back to sub 2%. i reckon 3.5 - 4% will be the best for our lifetime.

I suggest find whichever rate you can comfortably afford and stick to it. no point second guessing the market.

Sarah1Mitty2

ElwoodBlues said:

Sarah1Mitty2 said:

ElwoodBlues said:

Crystal ball time for me - my current fixed rate expires at the end of Dec, lender now allowing me to pick a new fix to follow from it. I'm inclined to pick and lock something in asap as I suspect rates will be going higher over the next 6 months. But I'm trying to decide between a 2yr fix or a 5yr. What are the predictions for 2.5yrs from now?

Rates offered are 6.24% for 2 yrs vs 5.69% for 5 years. That works out to about £35/month extra on the 2yr fix. Natwest have changed their ERC's so they're no longer linear on the 5yr product - so even in the 3rd year of the mortgage the ERC is still 4%. Sneaky, but clever of them, because it deters borrowers from chopping out of their 5 yr fix in the middle of it. I'm fortunate that my mortgage balance is less than 100k, and I have savings available to make a lump sum overpayment before the new fixed rate hits, but even so, I'm looking at an extra £150 to £200 a month of interest. I can afford it, but the thought of the bank making an extra £60k out of me over the remainder of my mortgage is a bit sickening.

On the one hand I don't want to be locked in at 5.7% for 5 years if rates are lower than that in a couple of years. On the other, don't want to take the shorter fix and pay more now, only to find rates at the end of 2025 are just as high as current (or even higher - that, I think, is fairly unlikely).

Be interested to hear what other people's crystal balls are telling them?

Fix for five and clear the debt, don`t try to predict rates, that is how so many people who bought a couple of years ago got caught out, but to be fair betting rates would go down from where they were was always going to be a far out call! I don`t think central banks will be cutting rates below 5% any time soon.

That's exactly what I have been doing so far. 5 years ago I fixed at 2.5%, thinking they couldn't really go lower, but a couple of years later my lender was offering 0.8%.

I've no expectation that rates will drop back to recent historic levels, but there's clearly potential for them to reduce from current in 2 or 3 years from now? I don't think the current rates are sustainable long term?

That was a pandemic though, and all the rate cuts did was encourage people into debt they couldn`t really afford? 2.5% is still a nice historically low rate and I think the FED in particular are very keen to get back to more normal rates and any reductions below 5% will be in response to very bad things happening in the economy, remember, as another poster pointed out recently - historical average base rate is 7%? Honestly, with only 100k on the balance I don`t think you should over-think this, fix for five and focus on making overpayments (or saving up overpayments for the end of the five years)

ElwoodBlues

simon_or said:

For a loan size under 100k, I personally would take out the 2 year fix and then direct some part of my surplus funds towards overpaying.

But that's just my personal aversion to signing up to long contracts with high exit penalties and the flexibility to absorb the downside (or reduce the mortgage significantly) if rates stay the same or go higher in 2 years time when the fix ends.

For next time, put a reminder to check in 8-9 months before the end of your fix. You could have reserved a Nationwide fix cost free back in May by doing a decision in principle, sat on it until the 6 month mark and then reassessed your options.

As I said in my opening post, my lender has only just opened the window to lock in a new fix (6 months). I thought that was normal, if not generous (thought some lenders were only 3 months). I wasn't aware that I could prearrange a switch to a different lender 9 months in advance, otherwise I'd have done that a couple o months ago when things started to tick upwards.

I was looking to extend my house within the next couple of years, but that would mean borrowing more, which I'm inclined not to do. I guess if house prices tumble I might be better off moving than extending in the near future anyway. I like this house, but just not quite big enough as my kids are getting bigger.

simon_or

ElwoodBlues said:

simon_or said:

For a loan size under 100k, I personally would take out the 2 year fix and then direct some part of my surplus funds towards overpaying.

But that's just my personal aversion to signing up to long contracts with high exit penalties and the flexibility to absorb the downside (or reduce the mortgage significantly) if rates stay the same or go higher in 2 years time when the fix ends.

For next time, put a reminder to check in 8-9 months before the end of your fix. You could have reserved a Nationwide fix cost free back in May by doing a decision in principle, sat on it until the 6 month mark and then reassessed your options.

I wasn't aware that I could prearrange a switch to a different lender 9 months in advance, otherwise I'd have done that a couple o months ago when things started to tick upwards.

Can't blame you, I only know that because of my broker, and posts on this forum.

For example, with Nationwide you can book a remortgage rate by doing a decision in principle which is soft check, no costs involved. This books the rate for 3 months. When you convert that to a full application and the offer is issued, you get another 6 months. Nationwide then gives a further 2 weeks grace for completion. 

There are other banks like coop platform (saved me a lot of money on a BTL remortgage this year!) which give a 3 month extension on top of the 6 month validity. And a few others as well supposedly though I don't know which.

PixelPound

bamgbost said:

As many have said, its difficult to suggest which is best as hindsight is a wonderful thing!

We went for 5 years 2 months ago. And all being well n good looks like a good decision. 4.09% with Halifax from Nov.
Now Halifax has effectively priced themselves out the market at  circa 6% for both 2 & 5 year options

In terms of medium to long term, rates are never getting back to sub 2%. i reckon 3.5 - 4% will be the best for our lifetime.

I suggest find whichever rate you can comfortably afford and stick to it. no point second guessing the market.

I fixed for a fairly similar rate at the beginning of the year, almost went for a 2 or 3 year since back then the BoE rate was supposed to peak around 4.5% before settling back down again to be under 3% in a year or two. I opted for 5 for certainty, and now glad I did. The rate has kicked in but as it's bet by some saving accounts I'm putting my overpayments in those for more flexibility (as well as a better return).

What would I do if I was making the choice now? Increasingly difficult, I'd kick myself if rates went down anywhere near to 3%, but as of now lots of offers at the 5% mark if those were affordable then you protect against higher peaks. The next General election in Jan 2025 or there abouts, so will the next government be wanting interest rates down or be doing other things that might keep them high?