New mortgage fix duration

ACG

It depends. 
If they have plenty of money in savings accounts or current accounts paying 0.01%-2.5% then no, at 3.92% they would still be making money. 

BikingBud

ACG said:

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. It's 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. 

Whilst I agree the monthly affordability is often the problem that people are wrestling with I do feel that fees are now driving the discussion much more than they ever did.

Fees of over £1k sometimes up to £1.5k every couple of years because people slavishly worry about rate changes and fear locking in, and rates going down, at the same time as not locking in and rates going up. Over 10 years and on a 2 year rate chase cycles, that could be between 5k and 7.5K difference. Unfortunately most have to focus on the month by month and cannot step back and consider the total amount payable where it might be more obvious that the significant impact of fees can be to make the interest rate difference negligible.

Two similar products from Santander:




So you might be able to recover some the 15k extra interest payable by chasing the rates every 2 years, (they might come down) but you will need to add the fees after 2 years and further renewal costs (1.2k every time? 8 renewals versus 3?) would need to be added in every cycle.

So you could try and amortise the fee but it should only be over the length of the fixed portion. 
 
We see those discussions everyday, this thread being a prime example and the business is I feel adding some confusion at the same time as trying to assure their income stream. 

One might draw comparison with PCP, where it appears the prime question is "How much per month" not how much am I paying for this car in total.

ian1246

If your right on the edge of affordability I'd fix for 5 or 10 years.

If your comfortable, fix for 2 years.

Inflation-linked pay rises vs. Rate rises is why I say the above .

I.e. if your mortgage is £225,000 a 1% rise in interest would represent an increase of £2250 a year - £187.50 a month.

If your income is £50,000 (£3147 take home) on Year 0, inflation is then an average of 2.5% a year, with your pay increasing at 2.5% a year, that means by the end of the 2 year fixed pay period your salary would be £52,531 a year (£3308.71 take home). By comparison, by the end of a 5 year fix your salary would be £56,570 (£3503.93 take home).

Basically - a 2 year fix runs an increased risk that an increase in your mortgage payments due to interest rate rises will exceed any future pay rises, causing your finances to be squeezed. A longer fix, due to the impact of inflation and pay-rises compounding, makes it more likely you'll be able to cope with a rate rise - this is especially the case when you factor in there will be less remaining capital after a 5 year fix vs. A 2 year fix - meaning a smaller impact from interest rate increases.

Altior

jake_jones99 said:

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?

It's not particularly helpful in my view to try and decipher the situation from the lender's perspective. They have many sources of cash, including it being effectively created out of nothing, arbitrage et al. 

Would you lock in a sub 4% savings rate for 5 years? In my opinion that would be a risky call. Given all of the headwinds that I touched on, and the prospect of the economy going gangbusters in the short term is extremely negligible. Arguably we are on the precipice of a sovereign debt crisis. You might lock in 4% for a year or two, however. 

It does actually remind me somewhat of the 'inflation is transitory' line back in 2022, and the institutions are in denial. I won't need to make a decision until 2028, but if I had to now I would jump at the chance of locking in an effective rate of sub 4% for the next 5 years. Ignore all the noise and what the alleged experts are saying, in the medium to long term they are almost always wrong. In the real world there are less people working, discretionary spending isn't buoyant and the cost of production is spiking. 

ACG

You are right, I have people call up asking about the best rate I can get... I explain there is more to the cost than just the rate. Sometimes it goes in, sometimes it doesnt. 

But in the case with Skipton the low rates are not there to entice customers (they cant be as they are only for existing customers), they are there to allow people to keep a roof over their head if there is a rate rise shock (3-4% isnt too bad, but if you have been on a 1.5% deal for a while and taken out loans and credit cars to fund a lifestyle then taking the lower rate with the fees might be a way to allow people to keep their home. 

Im not saying it is cheaper (it might be, although doubtful) but its there as an option for people who might otherwise struggle. 

jake_jones99

Altior said:

jake_jones99 said:

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?

It's not particularly helpful in my view to try and decipher the situation from the lender's perspective. They have many sources of cash, including it being effectively created out of nothing, arbitrage et al. 

Would you lock in a sub 4% savings rate for 5 years? In my opinion that would be a risky call. Given all of the headwinds that I touched on, and the prospect of the economy going gangbusters in the short term is extremely negligible. Arguably we are on the precipice of a sovereign debt crisis. You might lock in 4% for a year or two, however. 

It does actually remind me somewhat of the 'inflation is transitory' line back in 2022, and the institutions are in denial. I won't need to make a decision until 2028, but if I had to now I would jump at the chance of locking in an effective rate of sub 4% for the next 5 years. Ignore all the noise and what the alleged experts are saying, in the medium to long term they are almost always wrong. In the real world there are less people working, discretionary spending isn't buoyant and the cost of production is spiking. 

so if the economy is in crysis the interest rates would drop to support it. However if inflation peaks, then we're in trouble with the rates. What is your evidence the second won't happen?

jake_jones99

ACG said:

It depends. 
If they have plenty of money in savings accounts or current accounts paying 0.01%-2.5% then no, at 3.92% they would still be making money. 

Can you please explain this better? If they lend me at 3.92%, surely they could get 4.25% on it with no risk. The interest they're getting on other cash they may have, I am not sure how it affects this.

So my question is what are they getting by lending me at 3.92%, and how does that change with small increases in interest rates.