Mortgage question

[NotMyCat]

Posting for traffic and because I need a more adult adult

So I have a mortgage offer and there are two options due to affordability
1, fix for 2 years and clear all debt except £5000
2, fix for 5 years and clear all debt except £600

Extra info
The rates are 4.11 for 2 year and 4.65 for 5 year which is about £25pm difference
My credit is shocking so no, I can't get a better rate
I would still have adverse credit due to timing of defaults after 2 years and would probably need to use the same broker (fees are £2700)
After 5 years the defaults will be clear and I am likely to be able to use a high street bank

Help? My head says 5 years...

I read a book called the psychology of money recently and it was talking about how you need to manage money in a way that practically works for you and it may not be “optimal”

The only question I have about the 5 year is are you just kicking the can (learning new habits / ways of being with money) down the road?

How can you use the time to set yourself up better by the time 5 years are done? What big goals could you have?

@pitterpatterrain it's old defaults (I haven't had any recently) so new habits already in place and the debt was from old student debt and then job loss
So basically I just need to carry on the way I am (and I will have more money because it won't be being swallowed up by interest rates)

I would go 5 years. Although it's more on a monthly basis you'll have less in the way of debt repayments to make, plus you won't have to use a specialist broker for your next remortgage so fees should be cheaper.

Also, no one knows what will happen to the economy post-corona but there is only one direction for interest rates to go and you don't want to be getting another bad credit mortgage in a couple of years if they have gone up as you'll pay even more.

You need to look at this as the total cost of ALL interest paid over the 2 and 5 year time frames. So it depends a lot on the interest rates you are paying on the debt. If these are credit cards on high rates and you cannot balance transfer to a lower rate - which with bad credit you possibly can't - then repaying as much as possible but then having a higher mortgage rate makes more sense. BUT......

Consolidating debt in a remortgage is not recommended unless you can be 100% sure the spending habits won't happen again. I know you say those habits are changed but having extra spending money will be tempting.

Whatever you do I'd strongly recommend any freed up cash is directed to building up an emergency fund (at least 3 months of al bills, preferably 6) so there is savings available for unplanned items - the car breaking down, the washing machine dying etc. And do a really honest proper budget for all annual spending, and start overpaying on the mortgage. Even if it's £5 a month. Don't just spend it on a 'lifestyle'.

I'd suggest asking this question on the Money Saving Expert Debt Free Wannabe forums. You can get more advice there on debt repayment options too.

Also this budget planner changed my life!
www.moneysavingexpert.com/banking/budget-planning/

Do you need to factor in any penalty charges if you sell or any other reason to change?

I’ve got 3 five year fixed mortgages, 2 are on my main home, on a five year fix but with no early payment penalty because it’s highly likely I’ll sell in years time and will be paying them off.

The other is a BTL and the tenant has been there 10 years so far and will probably be there another 5 year but it has fairly steep early repayment penalties, as it’s an investment I weighed up the risks and decided it’s very unlikely I’ll be selling so prefer the five year fix. It also means the rent hasn’t been raised in 10 years and won’t be raised if they stay another few years.

2 years goes so quickly!

I would go for 5 and overpay as much as possible.

@Gerwurtztraminer that's what I am planning to do is build up savings in an account I have made which is separate so I have an emergency fund
I've done a budget, and all bills including new mortgage come in at £1000 (give or take £10) which leaves me on a bad month £300 for food/petrol/emergencies. They're essential bills like water gas electric council tax etc. I don't drink or have sky or buy gifts or socialise so..

Also report your post and ask for it to be moved to Money matters as you might get a bigger response.

If you really don’t think you could access a better rate in 2 years then fix for 5 and overpay as much as poss. Are they a whole of market broker? Their fees seem v high

@Vetyveriohohoh yes and no - it's a specialist adverse credit broker, I basically have maybe 3 lenders available to me so I don't have the whole of the market available (if that makes sense!)
I can't look at banks/building society it has to be an adverse credit lender

Ah ok. Seems rubbish that adverse credit means exorbitant broker prices. I’ve never paid more than £400.

Yeah it's not the best - however they did get me a DIP 12hrs after me first contacting them when everyone else said it was impossible!
In 2 years I can use another broker and may have slightly more options but still limited to adverse ones
5 years means normal mortgage

How would you otherwise repay the £5k debt? What’s the minimum monthly repayment?

£300 per month disposable means it would take you almost 18 months to pay off just the capital on the £5k debt, not including interest on it. Even if you budget carefully, it’s still going to take up to 2 years.

The 5 year rate costing £25 more pm will cost you 1500 over the 5 years in higher interest payments.

I would be inclined to do the 5 year and overpay by £50 per month. Be tight on spending and save the rest until you have some savings behind you again. Act as if you have to repay the debt. You’ll need the cash as a homeowner to cover repairs and maintenance.

I’d absolutely go for five years.

@Snorkello yes that's my thinking
It's complex but I have been a homeowner for 14 years (technically) so I'm ok with repairs etc / it's an apartment so no building repairs to cover and I have contents insurance of course
My plan was to put whatever I can aside into the savings account I have set up as some months I will be able to overpay and some I won't (my pay varies)

[quote NotMyCat]@Gerwurtztraminer that's what I am planning to do is build up savings in an account I have made which is separate so I have an emergency fund
I've done a budget, and all bills including new mortgage come in at £1000 (give or take £10) which leaves me on a bad month £300 for food/petrol/emergencies. They're essential bills like water gas electric council tax etc. I don't drink or have sky or buy gifts or socialise so.. [/quote]
As @Vetyveriohohoh says, this is mainly whether you are sure that in 2 years you won't be in a position to access better rates. As these rates are high as you know. Of course we can't know exactly what rates will be like in 2 or 5 years it's always a bit of crystal ball gazing.

@FAQs makes a good point about early repayment changes. I last fixed for 5 years but chose a slightly higher interest rate as at the time I was considering moving abroad and wanted the flexibility to sell without that being an extra cost. If you feel pretty sure you won't need to move in the next 5 years that's fine but do bear in mind life changes. My friend met a new partner and moved in with him but chose not to sell her flat as the ERP's were huge. She had to rent it out for 2.5 years and move to a BTL mortgage which meant she was barely covering her costs with the rent and was quite stressful.

I know you say you've done a budget but I do recommend that budget planner. A lot of budgets are too 'high level' to be useful. That one is really detailed (you can add your own categories) easy to use and understand. It really made me interrogate all my spending. I thought I was fairly frugal but it woke me up to some of my 'frittering'!
I now keep all my receipts, then download all my bank transactions monthly and use a spreadsheet I created with the same headings to monitor spending on the different categories. It also helps maintain cashflow for annual fees and other non-regular expenditure.

Good luck with the decision making!

@Gerwurtztraminer definitely
I'm not planning any life changes (single, and I would never put anyone else on the mortgage)
They rent easily for £550pm if needed but I've been here 14 years so far!
Rates.. I mean it may be slightly better in 2 years but it depends what adverse credit lenders are offering so crystal ball much needed!

The surveyor downvalued it by 15k (on a 100k property) or it would have been fine and gone through by now!

Are you consolidating the debt into the mortgage in each case, or just stating how much debt you will have at the end of each mortgage term?
I'd be tempted by the 5 year if you think you could have cleared the debts before needing to remortgage. An extra set of fees will wipe out any savings from the interest rates.

@PeonyTime consolidating but due to affordability, that is how much will be outstanding when the mortgage is gone through (so they have to leave some debt not consolidated)
So the 2 year one leaves 5k debt outstanding
5 year leaves £600

I'd go for five years. But I'm a bit concerned about why you'd think there was no maintenance costs. If you own it there'll be an annual service charge plus you'll have to share any costs to the entire building - new cladding, new roof etc.

5 years. The maths make this a better option.
If you banked the extra saved on the two year you save £600 to put toward the debt. Over all he five years you pay an extra £1,500. And end up with much less debt.

I would fix for 5 years and overpay where possible. The time, mental stress and cost of reapplying in 2 years isn't worth it.
Rates are at all time lows, my personal feeling is they won't get lower but could well get higher if inflation figures continue in the way they have been for the past 2 months.
This is not financial advice, only what I would do in this position.

@titchy oh yes, I already pay the service charges etc! I've been here since 2007 so it's technically a remortgage rather than new but it's changing to only me being on the mortgage

I've emailed them and am going for fixed for 5 years as my defaults won't have dropped off by then from when they were added to my file