If your adviser thinks you’d be fixing at a maximum of 1% “too high” I’m surprised they’re not recommending 5 years. I’m also surprised they’re telling you that - in my experience MAs are great at finding the right product for you - but don’t have interest rate crystal balls. Did you ask why he thinks they’ll stabilise at 4-5%? I wonder if his answer would be, “because”.
I decided to fix for 5 last December. Before the Ukraine war, but already increasing economic uncertainty with Covid and Brexit effects.
I decided by looking at how much I would lose out on if rates went down, how much just not having to worry about rises was worth to me, and what my options were at the end of the fix if I didn’t fix long enough.
So say I fixed at 5% - how much would I be “wasting” if it dropped to 4%? Say that’s £1000. Is £1000K worth it to buy peace of mind?
How much can I afford for it to go up? I could afford to pay 10%. Therefore, if I want I can take the risk that rates go down and I win by not fixing - cos I can afford the opposite. If you have no wriggle room to afford placing the wrong bet - don’t place it. If rates do go down, accept that you made the right decision at the time.
Then the end of the fix. What would I do if rates rose sharply? After a 2 year fix, I’d struggle. I’d simply have to find the money from somewhere. But after a 5 year fix, I’d have paid off an extra 3 years so if I really had to, I could add that time back into my remortgage to lower my payments. I also know I can afford to overpay during the 5 years if things look hairy. At the moment I’m prioritising additional pension but if we start h the next tax year on 8% mortgages, I’ll switch and over pay whilst still on my fix.
On that logic, why not a 10 year fix?
I only have 13 years to go. If retrospectively a 10 year fix would have been better, I’ve only got 8 years to go. So the actual £ impact is lower than someone with a 25 year mortgage. I also am very likely to have received a small inheritance in 10 years, but not 5. So I may have another option. I have some savings if I have to use them.
So all in all…
I actually probably made the wrong decision in December. I fixed for 5 years at 2%. If I’d done it 6 months later I’d have possibly fixed for 10.
But, I don’t have regrets because I know my decision making was sound, and I know that I have a plan for the unfixed years 5-10.
You need to get close to all your options, and your attitude to risk.