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  • FIRST POST
    • djrh
    • By djrh 9th Mar 18, 1:58 PM
    • 17Posts
    • 2Thanks
    djrh
    5yr or 2 yr fix
    • #1
    • 9th Mar 18, 1:58 PM
    5yr or 2 yr fix 9th Mar 18 at 1:58 PM
    Hi everyone

    We are in the midst of usual remortgaging dilemma..5yr or 2 yr.

    We bought our london flat in 2016 and are nearing the end of our 2 year fix expiring on 30th june with Accord at 1.69%.

    Our flat purchase price was for 660000 and was tentatively valued by an agent at 695000, however with the london market being flat, we understand the LTV may not have improved much.

    Accord our existing lender did not offer us a good enough retention so we are now looking elsewhere

    Our current balance is at 470,000 with an instalment of 1644 every month. We will need to remortgage for 30 years borrowing 457,000 as we intend to overpay 12k just before the deal expires.

    Our choices are

    Nationwide-2yr-1.39% plus 999 fee plus 129.75 estimated legal fees
    HSBC 5 yr-1.89% plus 999fee pus 129 other fees
    Barclays 2 yr-1.39% plus 999fee plus 115 other fees
    Barclays 5 yr-1.94% plus 999fee plus 115 other fees

    Our original plan until 4 weeks ago was to go for a cheap 2 year fix(which was then santander at 1.25%) and overpay as we did with our existing mortgage. However the rate increases and the general market news is making us wonder if it makes sense to go for a longer fix. When we reviewed the breakdown, the interest component was way too high compared to the principal component in the 5 year fix so the overall balance at the end of 5 years seems higher than if you would take 2 year fixes now then in 2020 and so on..all this if the interest rates remained competitive

    We will end up paying more than what we pay currently as our installments so any advise will be helpful.

    ALso if Getmore4less is reading this, your brilliant calculation can help us tons!!

    Many thanks!!
Page 1
    • DragonQ
    • By DragonQ 9th Mar 18, 5:13 PM
    • 2,000 Posts
    • 676 Thanks
    DragonQ
    • #2
    • 9th Mar 18, 5:13 PM
    • #2
    • 9th Mar 18, 5:13 PM
    Best I could find was 1.89% for 5 years, which is what I went for in the end (still not got the final offer back but expecting it any day now). I considered a 2 year fix but it seems almost certain that rates will rise in that time, and probably moreso over the following 3 years.

    It is stupidly hard to work out what is best though; even if rates do rise in 2 years' time, it can work out cheaper to get a 2 year fix now and a 3-5 year fix in 2 years. It totally depends on how much mortgage rates go up in that 2 years, how much you're paying each month, whether you can get to a better LTV bracket within 2 years (and whether that makes any difference - right now dropping from 75% to 70% LTV makes none at all), plus factor in the ~1k fee for every time you remortgage.

    For my personal situation I calculated the cost of a current 5 year deal and compared it to a current 2 year deal, followed by another two 2 year deals afterwards. For the 2 year deal method to work out cheaper, rates would have to rise by about 0.5% over the 2 years: paying 1.39% now, 1.89% in 2 years, 2.39% in 4 years is slightly better than paying 1.89% for 5 years (except the former option means you're "locked in" for an extra year). This assumes you pay the same monthly all the way through though, which you won't, hence it's very difficult to calculate.

    Ultimately, I think rates will rise faster than that, hence I went with the 5 year option.
    • timbo29
    • By timbo29 10th Mar 18, 9:11 AM
    • 42 Posts
    • 10 Thanks
    timbo29
    • #3
    • 10th Mar 18, 9:11 AM
    • #3
    • 10th Mar 18, 9:11 AM
    I recently applied through an adviser who got a DIP for me. For affordability purposes they wanted me to take the mortgage over 38years instead of 30 years for affordability purposes as my wife has just gone self employed.

    I applied for a 2 year deal and got rejected, they then accepted the 5 year fix. This was because of how they 'stress test' the mortgage payments!
    • Zero Sum
    • By Zero Sum 10th Mar 18, 11:49 PM
    • 369 Posts
    • 279 Thanks
    Zero Sum
    • #4
    • 10th Mar 18, 11:49 PM
    • #4
    • 10th Mar 18, 11:49 PM
    Personally id go for 5 year as rates are expected to rise
    • getmore4less
    • By getmore4less 11th Mar 18, 9:14 AM
    • 32,035 Posts
    • 19,222 Thanks
    getmore4less
    • #5
    • 11th Mar 18, 9:14 AM
    • #5
    • 11th Mar 18, 9:14 AM
    As you intend to overpay the max payment you could do would be useful.

    Ok lets start with the LTV, 457/660 69% 457/700 65.3%

    this is close enough to be worth looking to see if you can get 65% LTV that may open up more options but for some lenders 70% is already good enough.

    I think we can ignore the fees/costs as they are all very close and small compared to the borrowings.

    starting with the 5y fix over 30y and amount owing at Y2 and Y5

    457,000 1.89% 1,664pm 433,923 397,632

    and the rates stay the same using 2y

    457,000 1.39% 1,664pm 429,403 386,542

    up to 11k saving over 5 year(on this amount 1k on fees is likely)

    That sounds a lot but you have big borrowing an these numbers scale. the payment needed on the 5y fix to get to the same point on 2yfixes if rates did not change is 1,840pm ( 176pm )

    If you go 2 years new LTV is 65% or maybe as low as 62%

    if you think the market is going to stay flat then you may only squeeze a small improvements in rates from LTV.

    that leaves take the 2y and see what rate you need for the next three

    429,403 2.264% 1,664pm 397,627
    That's between 3 & 4 0.25% rises in the next 2 years.

    you said you can overpay so lets do 2kpm payments to see the effect

    457,000 1.890% 2,000pm 425,712 376,506
    457,000 1.390% 2,000pm 421,230 365,678
    421,230 2.274% 2,000pm 376,500

    overpayments have 2 effects they reduce the potential saving but increase the follow on rate you need.

    with the larger payment the potential for a LTV squeeze on the rate is there but at this level it tends to be in the 0.1%/0.2% range but on 400k that's 33pm for every 0.1% you squeeze the rate.

    -----------------------
    DQ brings up another point that I have thought about but not crunched any numbers for yet.

    looking forward you currently have 2 fixed point Y2 and Y5
    the first what can rates do at Y2 is speculative but manageable.

    Now if you take the 2y fix you get another choice at Y2 stick with the short term lower rates or go longer as you now think rate will rise quicker...

    Another option a lot of people overlook is a good tracker rate although these are no where near as good as they used to be when base +<1% were readily available.
    • djrh
    • By djrh 12th Mar 18, 12:15 PM
    • 17 Posts
    • 2 Thanks
    djrh
    • #6
    • 12th Mar 18, 12:15 PM
    • #6
    • 12th Mar 18, 12:15 PM
    As you intend to overpay the max payment you could do would be useful.

    Ok lets start with the LTV, 457/660 69% 457/700 65.3%

    this is close enough to be worth looking to see if you can get 65% LTV that may open up more options but for some lenders 70% is already good enough.



    I think we can ignore the fees/costs as they are all very close and small compared to the borrowings.

    starting with the 5y fix over 30y and amount owing at Y2 and Y5

    457,000 1.89% 1,664pm 433,923 397,632

    and the rates stay the same using 2y

    457,000 1.39% 1,664pm 429,403 386,542

    up to 11k saving over 5 year(on this amount 1k on fees is likely)


    That sounds a lot but you have big borrowing an these numbers scale. the payment needed on the 5y fix to get to the same point on 2yfixes if rates did not change is 1,840pm ( 176pm )




    If you go 2 years new LTV is 65% or maybe as low as 62%

    if you think the market is going to stay flat then you may only squeeze a small improvements in rates from LTV.

    that leaves take the 2y and see what rate you need for the next three

    429,403 2.264% 1,664pm 397,627
    That's between 3 & 4 0.25% rises in the next 2 years.

    you said you can overpay so lets do 2kpm payments to see the effect

    457,000 1.890% 2,000pm 425,712 376,506
    457,000 1.390% 2,000pm 421,230 365,678
    421,230 2.274% 2,000pm 376,500



    overpayments have 2 effects they reduce the potential saving but increase the follow on rate you need.

    with the larger payment the potential for a LTV squeeze on the rate is there but at this level it tends to be in the 0.1%/0.2% range but on 400k that's 33pm for every 0.1% you squeeze the rate.

    -----------------------
    DQ brings up another point that I have thought about but not crunched any numbers for yet.

    looking forward you currently have 2 fixed point Y2 and Y5
    the first what can rates do at Y2 is speculative but manageable.

    Now if you take the 2y fix you get another choice at Y2 stick with the short term lower rates or go longer as you now think rate will rise quicker...

    Another option a lot of people overlook is a good tracker rate although these are no where near as good as they used to be when base +<1% were readily available.
    Originally posted by getmore4less
    Hi Many thanks for your response though its still a bit of greek and latin to me so pardon my questions..
    1. I really doubt we can get to 65% as the central london market has crashed and we would be lucky if the bank valuation comes back at 660,000
    2.Sorry to sound daft but my head is whizzing at all the numbers, how did you arrive at 433,923 397,632 and 429,403 386,542
    3.Apologies, again can you please explain the method to arrive at 1,840pm ( 176pm )
    4.I do bulk payment every 3-4 months when my saver accounts mature, does every month overpayment make more sense even if the money is parked in high interest accounts for those months?

    I dont understand the calculation yet, but prima facie it appears that 1.39% might still be workable because of the big 11k savings? Please advise
    • getmore4less
    • By getmore4less 12th Mar 18, 2:14 PM
    • 32,035 Posts
    • 19,222 Thanks
    getmore4less
    • #7
    • 12th Mar 18, 2:14 PM
    • #7
    • 12th Mar 18, 2:14 PM
    the calcs are done using a simple amortization calculator, I use

    http://www.whatsthecost.com/mortgage.aspx

    I also have a spreadsheet with some more complicated stuff in

    2.Sorry to sound daft but my head is whizzing at all the numbers, how did you arrive at 433,923 397,632 and 429,403 386,542
    the trick with mortgages is you only need 3 values,
    amount borrowed,
    interest rate,
    payment,

    if you set the calculator to interest only and set a payment then you can change the term to 2 and 5 years and see how much is left up to that point.

    once you have the known numbers for a given rate at say Y2 and Y5 you can then work out others by playing with the rate or the payment(or both) to get the same amount left.
    3.Apologies, again can you please explain the method to arrive at 1,840pm ( 176pm )
    For that I up the payment on the 5y fix rate so it has the same amount left as a lower rate(the 2y fix not changing for 5 years) at Y5.


    4.I do bulk payment every 3-4 months when my saver accounts mature, does every month overpayment make more sense even if the money is parked in high interest accounts for those months?
    Using the monthly overpayments makes the calculation simple using the simple calculator. if you are getting a good rate on the savings it won't make much difference if the rate is better than the mortgage better off saving.

    Spreadsheets have the standard formula built in so it is quite easy to build a model that fits your payment profile if non standard.
    • prudential
    • By prudential 13th Mar 18, 12:42 PM
    • 17 Posts
    • 9 Thanks
    prudential
    • #8
    • 13th Mar 18, 12:42 PM
    • #8
    • 13th Mar 18, 12:42 PM
    I had a similar dilemma between 3-yr fix 1.79% no fees and 5-yr fix 1.79% 999 fee - both with Barclays. I'm in greater London, but at <60% LTV, as I bought in May 2012.

    No matter how much you calculate, in the end it will be down to your gut feeling and how much risk are you prepared to take. Also think about whether you might want to move or not, over the next 5 years.

    Personally, I highly doubt that in 2-3 years from now I will be able to access rates that are less than 2% so I went for 1.79% 5-yr. I plan to overpay as much as I can, so that in 5 years from now the mortgage balance is as low as possible - to ensure I can still afford to keep my home if rates will be significantly higher.

    I might be wrong about what will happen to rates, but even considering the 999 fee, 1.79% is the lowest fix rate I've ever paid on a mortgage (with 4.34% being the highest fix I've ever paid), so I'll consider it a good move for now... until April 2023.
    • prudential
    • By prudential 13th Mar 18, 12:49 PM
    • 17 Posts
    • 9 Thanks
    prudential
    • #9
    • 13th Mar 18, 12:49 PM
    • #9
    • 13th Mar 18, 12:49 PM
    PS. I've always favoured fixed rates as I'm risk averse and I like payment predictability, but in most cases I went for 2-yr deals. This time I thought I'd fix for longer, as I don't plan to move and rates are very low, historically speaking. Good luck!
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