To think a 5year fix on your mortgage is a con right now?

[Bluffysummers]

Admittedly this isn’t really my opinion more of wonderment?

my fix is coming to an end (joy) and when I last took out my mortgage, you paid more to fix longer and now it’s the opposite it’s the shorter rates that are more expensive.

traditionally you paid a bit more for security, and now it’s less? Is that a ‘sneaky’ (not the right word but let’s go with it) tactic from lenders to lock in customers at a higher rate for longer as they are envisioning the BR and thus their interest rates going down?

what are people thinking 2 v 5 year? I was thinking intially 2 due to the predictions that inflation will be close to the BoE target in mid point 2025 and therefore interest rates will come down (probably not to what they once were, but down none the less) so if you’re locked in for 5 years, you’re stuck. But then 5 years grants you the ability to budget for 5 years

I’ve always fixed and in 20 years (until very recently) I think I’ve always paid a bit more than if I hadn’t fixed. But it’s never bothered me, I liked having the security of knowing what my bills were. I’ve never once thought “what if”. Never kicked myself.

As a previous poster said, the key thing is to check the exit fees.

Our mortgage is due for renewal in just over 2 years. Our current plan is we will either move and fix for 5/10 years or stay put and fix for 2 as know we need to move. If we were staying put for longer it would be another 5 year fix for us.

I fixed for 5 years last March for 1.9%. It made sense to me to fix for 5 but not 10 but I wouldn't now. Probably fix for 2 years now.

@Bluffysummers
I personally don't but I could be completely wrong as unfortunately I don't have a crystal ball and neither does anyone else at the moment.
We were thinking of a tracker but didn't want to take the risk of paying way more than we would have on our fixed deal while rates rise and rise as inflation isn't going down as much as expected and markets are now pricing that in. I wouldn't pay for a two year fee then have to pay again in two years if rates are similar.
If they over tighten and there's a recession and massive cuts then will will regret it to some extent but I would rather have the peace of mind knowing our payments for the next 5 years.
Everyone's circumstances and feelings on it are different, get a decent broker. If you want to take the risk do, we didn't.

We are January, house bought in Covid times and restarting of childcare costs as of this month.

We are however looking at a tracker, more initially but when the rate drops it will drop too. As you say 5 yrs used to cost more but they are factoring in the drop (by however much and when that may come)

I am moving soon. Currently on a 5 year fixed, with about a year left. Not sure if I'm able to port in this case but, if not, I'm seriously thinking about a tracker. I work in the business, although not directly. Three different work colleagues have suggested a tracker, as they believe rates will come down in next couple of years.

I've always previously fixed for 5, but not this time.

No, it's about what the economists at the banks expect to happen to short and long term interest rates.

Sorry I’m being dense, so you think they will go down or they won’t ? (It’s been a long day)

we mooted a tracker too but the fact predictions are now 6% maybe by the end of the year… doesn’t look appealing for us right now.

as an aside how do you like being a FA? I have a few exams (ro1 and ro5- was debating carrying on cf6 and the rest but most mortgage advisor jobs pay less than mine now and when I changed from banking to insurance there was a massive bank cull of financial advisors so it put me off, plus the cost and actually studying)

Hence why I said in the Op I don’t actually think it’s a con but more that if they think the BR will go down and are costing that in, is it worth going for a 5 or not given that the banks themselves think it will have gone down

It's not particularly a con, it's always about the tradeoff between the possibility of getting an advantage from taking a chance on something uncertain vs having longer term certainty.

I think you have misunderstood the rationale for the differences in 2y vs 5y fixes. When interest rates were low you paid more for a longer fix because you were paying to keep the "good times" going for as long as possible. When interest rates are high it is obviously the other way around because these are the "good times" for the lender and they want them to last as long as possible.

A few years ago, mortgage lenders knew interest rates would go up at some point but didn't know when. The longer your fix, the more expensive the rate because the lender would start to lose money once interest rates rise above the fix point so obviously a 5 year fix needed to be more expensive.

Now, interest rates are high and the mortgage lenders are reasonably sure that they will go down again once inflation has stabliised. A mortgage lender who offers a short fix of 2years can be reasonably confident that interest rates will be reasonably high throughout that fixed period. However, if a customer signs up for a 5 year fix it is reasonably likely that for the last 2 or 3 years of that, headline interest rates will be significantly lower, but that can't be guaranteed. So the bank is effectively sharing the risk with the customer to allowthe customer some certainty whilst giving the lender a reasonable chance to make a profit. If interest rates fall sharply from 2025 as expected then the bank will make a healthy profit from the borrowers who are locked in until 2028. If interest rates stay high the lender could make a loss.the customer is free to take all the risk themselves and sign up for the more expensive 2 year fix now, in the expectation of getting a deal for a percent or two lower in 2025 - or they might get bitten if rates go up further and don't come down.

Either way if you calculate the average outcome across all possible combinations of likelihood, both decision options (2yr vs 5 yr fix) come out with broadly the customer paying the same and the lender making a similar profit level whichever option the customer chooses, and that balance point works out correctly with the 5yr fox bring cheaper. Obviously the exact median middle option is unlikely to happen for every single one of the many factors that will influence what actually happens so in reality by 2028 we will be able to look back and say whether the customer or the lender was the "winner" or "loser" from the deal but we can't predict which.

I have been a mother for 4 years and im starting to see no change in my life as in growth, because i am just doing looking after my kids and have no time. Is it wrong for me to want to self improve? I am wondering how you parents, free up the time to better yourself and develop

No that’s exactly my understanding of the rationale behind 2/5 year fixes

Then yes YAB totally U and it's weird and possibly damaging to other MN users to have made this thread.

You have to do whats right for your situation and circumstances. I brought in 2018 when I was single and earning a graduate wage. Im still single but earning nearly double now. I fixed for 10 years and everyone laughed now Im fixed for another 5 years paying 3.99%, yes during covid I could have paid less but I had the security throughout the unknown and still have the security for another 5 years. Do whats right you for and your family x

Calling all mums for help

@JaukiVexnoydi thats really useful for a layperson, thank you so much.

You need to start a new thread, this is one about mortgages so your post will be missed.

But that’s why I said in my OP that I don’t actually think it’s a con but it’s tricky to know what to do

It's really not in the slightest bit related to what banks/economists/mortgage lenders think is going to happen. They don't know what's going to happen either and don't take those sorts of risks.

To offer a 'tranche' of fixed rate mortgages, banks enter into a swap - for 2y, 5y, 10y etc. If they secure a 5y swap rate at (say) 4.90%, they will then offer a 5y fixed rate to their clients at (say) 5.25%. the difference between the 4.90% they secured and 5.25% they are charging clients is their profit. It's really not based on where they think rates might go in the future - if they got it wrong (which is likely as the market swap rates move every second of the day), they would go bust. It's just a function of what they can secure in the market themselves before they offer a rate to their clients.

As such, mortgage rates follow swap rates. Please don't have a look at LIBOR in the FT, LIBOR was discontinued at the end of 2021. If you want to keep an eye on swap rates, you can get them here: https://www.mortgagesforbusiness.co.uk/research-data/money-markets/

Although the average over 2/5 years I’d not looked at

My mortgage rate renews on 1st July so I locked in back in February on a 5 year fix at 4.95%. I’m not a natural risk taker and I wanted the security of knowing what was going to happen. Plus the 2 year fix was quite a bit more and I chose to suffer less each month but over a longer period to make it more palatable. There’s no right or wrong unless you have a crystal ball. You just have to make the best decision you can based on what we know right now

If I was looking for a fixed mortgage I would go for 5yrs.

That makes sense it’s comparable to how banks make money current account and loan wise.

i don’t quite get the swap rates, what does that mean for a 2 year fix v 5 (forgive me if I’m being dense)

I would not fix for five.

I work in Banking.