Fixed rate - the risk

Gorgeous_George

Except when you owe more than your house is worth. Not free to remortgage or even change products with currrent lender. Stuck on the SVR - not nice.

GG

Generali

Gorgeous_George wrote: »

I still think that the North East will suffer somewhat less than many areas.

I think the opposite, personally. The reason for this is that AFAIK, the NE has almost no real economy any more: virtually all of it's GDP comes from Govt spending.

If the govt runs out of money (likely in the case of the current shower as they're running a massive deficit when times are good so they'll be stuffed when things go wrong which they will one day) or the electorate votes in a govt that is less willing to spend such vast amounts of our money then the economy of the NE is going to be in tatters.

According to a piece in The Sunday Times a while back, 70% of the GDP of the NE of England comes from Govt spending, a greater proportion than many Central European countries under communism.

MarkyMarkD wrote: »

I don't really understand your point, or agree.

Only a very small minority of fixed rates maturing in 2007 or 2008 have extended ties.

Most people are therefore free to remortgage, or switch products with their existing lender, or sell up and redeem their mortgage without penaltywhen their fixed rate ends.

If you are switching product with the same lender, changing underwriting criteria are irrelevant - product switches are not underwritten.

2 points:

1. Fixed rate mortgages are at a considerably higher level than they were in 2005/6 - anyone coming off a 2 year fix and remortgaging will be paying substantially more in interest.

2. The credit crunch/lack of a market for securitised loans means that there will be fewer funds available next year for lending unless things get back to where they were pretty quickly. That seems unlikely to me but you never know I suppose. Product switches may not be underwritten at the moment but if funds become limited as seems likely you can be sure that cheap funding will only go to the very best risks.

Running_Horse

I prefer to take the pain when rates are rising.

It makes it easier to save and make overpayments when they fall.

MarkyMarkD

Gorgeous_George wrote: »

Except when you owe more than your house is worth. Not free to remortgage or even change products with currrent lender. Stuck on the SVR - not nice.

GG

No, GG. You can switch products with your current lender irrespective of what has happened to your LTV since the original advance - even if you've gone into negative equity - because product switches are not underwritten and no valuation is undertaken.

As Generali says, there is a small possibility that this might change if credit conditions toughen up - but personally, I doubt it.

Jonbvn

IMHO 2-year fixes really only benefit the lenders/advisers, since at the end of the fixed rate period you have to remortgage or arrange another mortgage with the same lenders. This means you could end up paying a lot of fees over the lifetime of your mortgage.

Given the above, longer term fixes or trackers seem to offer better overall VFM.

Gorgeous_George

MarkyMarkD wrote: »

No, GG. You can switch products with your current lender irrespective of what has happened to your LTV since the original advance - even if you've gone into negative equity - because product switches are not underwritten and no valuation is undertaken.

As Generali says, there is a small possibility that this might change if credit conditions toughen up - but personally, I doubt it.

That surprises me greatly. If someone owes 150% of the value of their house, a lender will let them move to a cheaper product. I thought all banks were ba$tards?



GG

Generali

Gorgeous_George wrote: »

I thought all banks were ba$tards?

You've a higher opinion than me! A bunch of encouler des porcs if you ask me.

MarkyMarkD

Jonbvn wrote: »

IMHO 2-year fixes really only benefit the lenders/advisers, since at the end of the fixed rate period you have to remortgage or arrange another mortgage with the same lenders. This means you could end up paying a lot of fees over the lifetime of your mortgage.

Given the above, longer term fixes or trackers seem to offer better overall VFM.

The vast majority of the benefit goes to the advisers, with a small amount to the borrower's solicitors and the lender's valuers. The borrower's benefit is probably the smallest of these 4 and the lender's profit will be hardly anything.

Lenders don't push 2 year fixes for fun - they do it because supposedly it is what the market demands. And that demand is to some extent fuelled by advisers who love to churn their customers as frequently as possible.

towl

Gorgeous_George wrote: »

Hi

Many people will fix for 5 years (or less!) in 2008. Before doing so, they should consider what might happen when the fix ends.

If house prices have fallen over the period, they could be in negative equity and stuck on the lender's SVR. Unable to move and with a debt that is barely affordable, it will be a desperate situation.

If you are remortgaging, at least consider a 'life of mortgage' base rate tracker. Preferably one with little tie-in.

It's surprising how quickly 5 years pass.

GG

I kind of agree with where you are coming from, that people do need to think about where rates may be or house prices when their fixed term runs out, however you are oversimplifying matters, and ignoring other issues when suggesting we all take up a lifetime tracker.

Fixed rate deals offer stability to people, knowing what their biggest expense is to be over the next 60 months, this makes budgeting so much easier.

You ignore the amount repaid over the 5 year period, for example if I bought a house for £111k, taking out a £100k mortgage and putting down a 10% deposit of £11k, in 5 years time the balance of the mortgage would be roughly £89K. For me to be in negative equity, the house price would have to of fallen by 20%+. This is entirely possible, and I won’t deny that, and if I was buying with less than 10% deposit I would be extremely cautious about buying at all.

However this situation is based on a new purchase, you talk about re-mortgaging in 2008. So if we take my example as me purchasing in 2003 for £111K, I have a mortgage of roughly £89k on a house bought for £111K in 03, which has appreciated by at least 7% a year, meaning it would now be valued at roughly £155k. For me to be in negative equity, at the end of my next 5-year fix, my house would have to have lost value, from a ‘perceived’ £155k to 89K, this is a fall of over 40% and a run of on average just over a 10% fall each year. I haven’t read of even the biggest doom and gloom merchant predicting this kind of crash (yet?).

The above also does not take into account any overpayments that I will have made in the last 10 year period. Or if I were buying in 08 would make in a 5-year period. Also if I put down a larger deposit then prices would need to fall further still.

Negative equity is a real and possible danger, and many a person has been trapped in the past, however every one of us is in a different situation, and should think about what is best for our situation.

Sorry if this post is way too long, I like the OP feel people do need to think about their own situation and what consequence their choice of mortgage has for them, however where a lifetime tracker works for one, it may not work for another.

alan44

Jonbvn wrote: »

IMHO 2-year fixes really only benefit the lenders/advisers, since at the end of the fixed rate period you have to remortgage or arrange another mortgage with the same lenders. This means you could end up paying a lot of fees over the lifetime of your mortgage.

Given the above, longer term fixes or trackers seem to offer better overall VFM.

They are for amateur investors who need to realease equity in a market they anticipate will rise in the short term, but can't afford their mortgage rates to rise, as they can't afford to supplement it themselves. In other words, people who are overstreaching themselves.

Tracker ones can be worthwhile though if you feel interest rates are going to fall significantly in the next two years, so you can then fix for the long term.