New mortgage fix duration

jake_jones99

Buying a new house as a first time buyer, and I'm hesitating between a 2-year and 5-year fix. The rate for 2 fix is 3.69% and for 5 fix I could get it for 3.84%. 

The question is, how should I read the current rates given the bank of England rate of 4.25%. Given the banks need to make some profit, does it mean they assume the BoE rate would drop well below 3.69% by 1% or more in 2 years? And if it doesn't, banks will increase rates a bit to not lose money? 

Given the current reluctance by BoE to drop it seems unlikely to end up 2.69% in two years, and I'm a bit confused of why banks would think that, or maybe it's some other game they're playing?

ACG

Are those with Skipton? If so, I think the arrangement fees are 2.5% in which case you need to add 1.25% or 0.5% to the rates. 

The expectation is that rates will come down at some point this year by maybe 0.25% or 0.5% but nobody knows for sure. You have to have a think about what you think will happen and what you are comfortable with. 

Historically I have always done 2 year fixes, but in 2023 I paid my ERC in order to secure a 5 year fix - 1.5% ERC in order to secure 2.5% for 5 years. It was a gamble but its paid off. 

BikingBud

We have got so used to chasing interest rates and we now find that charges are becoming extreme.

Newbie_John

What's the fee? In my case I see 3.8% with Barclays for 2 years but after adding the £999 fee (divided by 24 months) it's more per month than the 4.0% option without a fee.

And yes, with 4% they take a bet that over time it will drop, not many saving accounts these days pay 4%..

Emmia

Ultimately rate picking is a crystal ball game, if you pick the 5 year and rates climb you'll be sitting pretty, but if they fall, not so much. 

A colleague took a 10 year fix just before the Truss meltdown.. It looked expensive then, they're doing pretty ok now.

Personally, I like longer term certainty, so as a FTB I'd go for the 5 year fix. Whichever you choose, you need to be able to afford the monthly payments, and I'd probably avoid looking at rates too often once you have the mortgage in place.

ACG

BikingBud said:

We have got so used to chasing interest rates and we now find that charges are becoming extreme.

Its not really extreme. 

Look at the people who took out mortgages at 1-2%, if they then come to the end of that product and the option is rates of 4.5% or 3.69% with a higher fee - it might be the difference of being able to keep the roof over your head. 

Back in 2023, when we had gone from rates of 1-2% up to 5-6%, it was an awful year! Every conversation was a bad one and we were extending peoples terms, look at part repayment/part interest only just to allow people to keep a roof over their heads and all of the associated costs of selling up. 

Dont forget, they are not for purchases. They are just for people remortgaging and are there to help people in a difficult position. The overall rate is actually not too bad even with the fee. Its not market leading but retention deals rarely are. These products have a place and I am sure people are thankful for them, but it is important to look at the rate and the fees. I dont think this is Skipton trying to fill their boots by pulling a fast one. 

Shadyocuk

The question to ask yourself is which of these two options would you regret the most.

1) You take the 5 year fix and rates go down so you have effectively overpaid

2) You take the 2 year fix and rates go up , meaning you struggle to make the montly repayments in years 3 to 5

Only you can answer that for your circumstances.

jake_jones99

I get all your points and thanks. I am aware of the two alternatives. My question was more technical. If a bank has a 2 year fix of 3.69%, what are they pricing in exactly? This tells me what would happen of the BoE rates were to go one way or another. 

My belief is the BoE rates will go down but very slowly, maybe from 4.25 to 3.5% in two years at most. What will the 2-year product be then? Would it stay at 3.69%, go up, go down? Or is there no rule whatsoever?

ACG

jake_jones99 said:

I get all your points and thanks. I am aware of the two alternatives. My question was more technical. If a bank has a 2 year fix of 3.69%, what are they pricing in exactly? This tells me what would happen of the BoE rates were to go one way or another. 

My belief is the BoE rates will go down but very slowly, maybe from 4.25 to 3.5% in two years at most. What will the 2-year product be then? Would it stay at 3.69%, go up, go down? Or is there no rule whatsoever?

Theyre not pricing it at 3.69%. They are pricing it at the rate + fee. 
But the pricing includes many different factors - expectations of rates, cost of raising the money in the first place, arrears rates, whether they want to get money out the door or not, what the rest of the market is doing etc etc. 

My mate is a product manager and we were talking about that today. Some lenders have started to use AI to work out where they should be pricing. 

Altior

jake_jones99 said:

I get all your points and thanks. I am aware of the two alternatives. My question was more technical. If a bank has a 2 year fix of 3.69%, what are they pricing in exactly? This tells me what would happen of the BoE rates were to go one way or another. 

My belief is the BoE rates will go down but very slowly, maybe from 4.25 to 3.5% in two years at most. What will the 2-year product be then? Would it stay at 3.69%, go up, go down? Or is there no rule whatsoever?

Another poster called it the 'Truss meltdown' back in 2022.

That is actually a load of nonsense, central bank rates across the west all went up to more normal levels with the ending of lockdown and QE. To combat the huge spike in global inflation. 

Point being that none of this was predicted in the retail mortgage rates, BoE, OBR or the general markets. Even though the spike in inflation was very predictable. The Russian invasion of Ukraine less so. 

I would encourage you to make your own judgement. What's the lowest that you feel the general re-mortgage rates can feasibly go in the next 5 years? Do you think we'll see sub 2% rates again? Or do you think there is more risk on the upside? 

In the UK at least, the 2% inflation target seems a long way off. And only headwinds on the horizon I would argue. 

jake_jones99

Ok, including the fee it's 3.92%. If BoE rates stay the same for two years, let's say, would mortgages stay at 3.92% and make them lose money?