Fixed rates - 2 year or 5 year

[trix1]

Im just about to change my mortgage and dont know whether to opt for the 2year fixed or the 5 year fixed. Has anyone got any opinions on this???

Message withdrawn

Thanks Orinoco,

Do people generally prefer fixed rates to the tracker option?

I like a fixed rate cos I like to plan ahead and know what my mortgage is going to be each month

but I'm very risk-averse; like the pp said, it's up to your personal situation/ approach

We have a 5 year fixed mortgage and am really happy that I have, although it was easy for us to decide as ds had only just been born and we want another baby within the 5 years so knowing that our payments will be the same for the whole period is reasuring to us.

We've got 5 yr fixed rate as we knew at the time that we planned to stay here for a while (we are still here 3.5 yrs later) and the mortgage company that we are with got an excellent rate too. 2 yr flies by before u know it but depends if you are planning to stay at your house at a short or long stay...

we prefer the fixed rate too as we know how much exactly we are paying out every month for the mortgage

We took out another 2 year fixed rate recently and although we got a good rate, I was stunned at the cost of the arrangement fee. (£600) I would advise that when you work out the cost of your fixed rate - take the arrangement fee into account and if you're changing provider check what the exit fee is with your current provider. You'll need to add those costs in to work out the true cost of the mortgage. Otherwise fixed rates are great for knowing what your monthly outlay is. With ours you can also overpay (if you find you have additional money), so it's pretty flexible.

I can get 5.65% fixed for 2 or 5 years if I stick with my current lender, is this a competitive rate?

that is an average rate atm

Part of my work is teaching the people at banks who do the calculations for banks who offer fixed mortages.
They are typically very smart people, typically with a PhD in physics backed up with a masters in finance.
Part of the training my gang do is formal lectures in blackjack, roulette and conditional probability, one of the people we get in wrote the currently best selling book on poker.
www.amazon.com/Poker-Face-Wall-Street/dp/0471770574/sr=8-1/qid=1157449509/ref=pd_bbs_1/104-0906310-5234362?ie=UTF8&s=books

If these guys bet against you, then you have to expect to lose.

You may read in the papers that rates are expected to drift up.
This is sort of true, but the people at the banks know this as well, and the rate you will get reflects thet expectation, plus some extra cost. The extra cost comes from the fact that fixed mortgages are more risky for the bank, and this is for them a "cost" which they expect you to pay for.
So fixed mortgages are not a way of saving money, you wil on average lose money from one, and as RachH points out that could well be a big loss.

It is only worth having one if you are very close to the absolute maximum you can afford, and where even a relatively small movement could sink you financially.
In a two year period, you would not on average expect rates to go up much, and it's quite hard to see how the large set up and exit fees make it worth doing.
Over 5 years, pretty much anything can happen, we could be at 15% or 5, though not with equal probability.
However, the critical term is how much above current interest rates you are committing yourself to. So it may simply be worth taking a tracker and setting up a standing order to a rainy day account.
Also bear in mind that over a few years on average you can expect the value of your house to go up, and some small % of the debt to be reapid. That makes your mortgage in N years time less risky, and thus you can expect to pay slightly less when you change provider.

Disclaimer, I'm not an IFA, though I did build a good chunk of the system HM Treasury uses to manage the national debt.

Thanks for that Domnini - are you suggesting then that a tracker mortgage would be the preffered option?

One tracker option that is available with my current lender is to pay 700.00 fee and for two years be tied to a tracker rate of 0.14 above bank of england rate which would currently be 4.89% Does this sound attractive? the other tracker options are no better than the fixed rates providing the rates stay the same.

Trackers seem OK, provided the netry 7 exit fees aren't too bad.
And alos of course provided that it is not from Northern Rock. They have a bad reputation for doing stuff like retrospectively changing the terms so that you enter a mortgage with small/no exit fee,and then you get a letter saying "we changed our minds, 3,000 quid please".

Message withdrawn

Yes, it's mostly like that.
There's a couple of dynamics at work in the rate you pay.
Banks often package up a few thousand mortgages and sell the rights to this money to various types of investor. If you have (say) 100 million quid owed to you then you can be 100% certain of getting 90 million, and the remaining 10 may or may not get paid, and you can be 100% certain you don't get it all.
The ability to resell morgages makes them cheaper, and the spread over the risk free rate is partly a function of the risk. This risk is not only default risk, but also the amount that interest rates are expected to bounce around, not just their average. Banks assume that the higher the base rate, the more it will change in any 12 month period.
The default rate on British mortgages is extraordinarily small. A few years back there was a blip but that was actually a self inflicted injury by the banks because their retail arms were run by 3rd rate accountants.
Thry now have 1str rate acocuntants stopping them doing too much harm, so that is very unlikely to repeat.
If you had had nerve, a basic finance textbook (and a few hundred million quid) you could have got very rich over this blunder.

5.65% is to stay with the same lender, it would be hassle free. Do you think I would be better off going elsewhere for a better rate?