Advice on which mortgage options to go with.

[IWantToGoToMars]

Myself and my husband are first time buyers are are looking at mortgage options but I'm unsure which option is preferable. We only have a 5% deposit so are being hit with not great interest rates.

Our mortgage advisor has said that the length of the mortgage won't affect the rate in our case, this would be 3.6% for a 2 year fixed mortgage or 3.8% for a 5 year fixed mortgage. For overpayment we would be capped at 10% of the outstanding mortgage value per year for the fixed term, then uncapped.

The questions are:

Is it best to go with a 2 year or 5 year fixed rate at the available percentages? I'm unsure whether fixing for 5 years at 3.8% is preferable to avoid interest rate rises, then potentially remortgaging after 5 years is best, or fixing for 2 years and remortgaging after that hoping to get a better rate due to higher LTV but risking interest rate rises sooner.

Also, is it best to go for a 20 year mortgage with a higher monthly repayment and less overpayment vs a 30 year mortgage with lower monthly repayment and more overpayment (we can afford the monthly repayment on the 20 year reasonably comfortably).

We would more than likely be living in the house for more than 5 years but would at some point down the line be looking to move/sell.

Until about 2 weeks ago I had no idea about mortgages so am struggling to get my head around which option is the best, with the fixed terms and the length!

For our first house we did 5,% deposit and went for 40yr mortgage to afford the payments. We fixed for 2 years, then when we remortgaged we had 10% equity, and lowered term to 38years and fixed for another 2 years.

I'd always recommend going for longest term so its affordable and then lowering each time you remortgage. Better to male overpayments as they are purely capital.

Also don't stress yourself about overpayments too much. Make sure you keep enoigh money to actually do things! You'll have the mortgage for a long time, plenty of time to pay off

We’ve just remortgaged and opted for 5yr fixed. Given the uncertainty that Brexit (or whatever happens) brings we opted for the longer fix to hopefully be past the worst of any political and economics upheaval

What rate did the advisor quote you for a floating/tracker rate over 2 and 5 years and how does that compare with the fixed rate? What is the arrangement or other fee for each of these products. You should factor that into the total cost of the mortgage.

I thought the rates of 3.6% and 3.8% that you were quoted were a little on the high side. I went on moneysupermarket to get an idea of the current mortgage rates that are being quoted. Am I right that your Loan to Value (LTV) ratio is 95%? If your LTV were 90%, the rates quoted would be around 1% lower.

Therefore, if you could pay off 5% of the mortgage over 2 years, then it might be worthwhile to get the shorter 2 year fixed and remortgage again in 2 years at the lower rate. Nothing is guaranteed of course and rates could move etc but it is a consideration.

I believe there is no difference in the amount of interest you pay whether you take out 20 year mortgage or a 30 year mortgage so long as you make the same amount of repayment a month - I could be wrong about this but this was the answer I was given when I checked with my advisor. If this is true for you, then taking the 30 year mortgage gives you more options if you decided you did not want to overpay that month or more - say you wanted to use the money to go for a holiday instead or if one of you lost your job. This is subject to the caveat that the amount you intend to overpay per month on the 30 year mortgage does not add up to more than 10% of the outstanding loan. Bear in mind that if the 10% is calculated over the amount of the outstanding mortgage at the start of the year, the absolute amount that 10% comes up to decreases every year, which is significant if you are on the longer 5 year product. If you are likely to get large bonuses as part of your job, then the 10% restriction on overpayment is likely to curtail your ability to overpay using bonuses which is a factor in favour of the 20 year mortgage.

Thanks for for replies. Length wise I think we are tending towards the shorter option, even for 20 years that is still less rent than we are paying currently, and we are already in our mid 30s, so a bit late on the housing ladder!

Brexit is indeed a concern on rates, and we are at 95% LTV which is why we are being quoted 3.6 and 3.8. That's my exact quandry, do we take 3.6 for two years, hope to be at 10% LTV then switch to a different rate. Our advisor quoted us around 1.8% for 10% LTV. But then whatever interest rate changes happen will affect us after 2 years. Or do we just stick with the poorer 3.8 for 5 years.

How much are interest rates likely to rise? No one knows the answer I guess but in 5 years is it going to be as much as we will lose out by being on 3.8% for an extra 3 years?

I believe there is no difference in the amount of interest you pay whether you take out 20 year mortgage or a 30 year mortgage so long as you make the same amount of repayment a month

That sounds wrong, CBA to work it out, as with a 30 year mortgage you are making the payment for another 10 years, so will pay a huge amount more!

In those circumstances OP, I would probably go for the 5 year fix as it's only slightly more and gives you certainty over a longer period of time. However, are there any fees? Fees are more significant over a short mortgage as you pay the fees more often so can end up paying more overall. But then, if you think you can save or overpay over the next 2 years, it might be better taking the two year option, saving as much as possible or overpaying what you can, so in 2 years time you may qualify for a better product because you'll be on 80/90% instead of 95%. However, that relies on your circumstances not changing in the 2 years so you don't qualify for a new product or house prices not dropping, because if they do, you may not have the equity.

But what happens if you don't take another deal after the fix. You will go onto the standard variable rate, which is sometimes quite good and then you aren't locked in and can take out a new product at any time.

The 20 year option also sounds like a good idea, if you can comfortably afford it - ie it's less than the rent you have been paying. But could you cut back on other things if one of you lost your job or became ill? You only have a 5% deposit, so it sounds like you haven't had a huge amount of spare money recently, as if you had, you would have had more savings?

I would go for the FIve year fix for the peace of mind. The uncertainty around Brexit would worry me. If you are both self disciplined then go,for the longer term repayment and save the difference. If there is an emergency you will then have a cushion of money, rather than having to borrow at a higher rate on credit cards or personal loans if no emergency occurs then you can make a capital repayment each year if it allowed by your fixed deal.

If you have no self discipline and think you might spend the cushion, then go for the shorter repayment terms.

Personally I’d go for 5 year fix and 20 year period but I’m naturally fairly cautious.

Find an online ‘mortgage overpayment calculator’ and play with the figures there to figure out your best option re length of mortgage, overpayments and interest rates.

The difference in interest rates is negligible between the 2 and 5 year fixed, so I would say really think about whether your circumstances may change in the next five years.

With both fixed rates you have an early redemption penalty if you pay the mortgage off within the fixed rate period. It's normally 3% of the outstanding balance, but for 5 year fixed rates sometimes it's tiered.

The 5 year option gives you the certainty for longer, but ties you in for longer, so if for any reason you have to sell before the deal ends, you could face a penalty.

I am a broker, and this year all the remortgages I've done for clients who bought 2 years ago on a 2 year fixed, have been able to remortgage onto a much lower interest rate due to the combination of the capital paid off and house price increases, so are now on under 90% ltv, some even 85% ltv.

That said, it's impossible to know what rates and house prices will be in 2 years, so it is a gamble.

I've also done a number of mortgages where clients were 2/3 years into a 5 year fixed rate. The didn't foresee a change in circumstances originally, but things change, and so their only option was to pay the £££ ERC.

I believe there is no difference in the amount of interest you pay whether you take out 20 year mortgage or a 30 year mortgage so long as you make the same amount of repayment a month

That sounds wrong, CBA to work it out, as with a 30 year mortgage you are making the payment for another 10 years, so will pay a huge amount more!

It does sound wrong. I should explain myself more clearly. Say the monthly repayment under a 20 year mortgage is £2000 and under a 30 year mortgage is £1500. Since the OP can comfortably afford the repayment on a 20 year mortgage, she makes the same repayment amount of £2000 even if she takes out the 30 year mortgage.

By doing this under the 30 year mortgage, she is making a £500 overpayment every month. This overpayment goes into reducing the capital of her mortgage every month and thereby chipping away at and shortening the length of the 30 year loan by a little each month.

If she continues paying £2000 every month, her 30 year loan will eventually be paid off in 20 years anyway. This is what I mean by the total amount of interest paid remains the same whether it is 20 or 30 years so long as the OP pays the same £2000 repayment each month - or at least is my understanding of what my mortgage broker told me ...

We went for a long-term and overpay. I wanted the flexibility of having a smaller (unfortunately not small) fixed payment. Like others have said if you might get to 10%ltv in 2 years the shorter fixed might be worth it. There are calculators out there that will help and take into account fees. It also depends how much your circs might change. We went for a longer fix because we knew we wanted kids and weren’t sure we’d get the same income multiplier once I was on a reduced wage and childcare costs were considered.

user makes a good point. Go for a longer discounted term (5 years) if your joint income is likely to drop or become unstable in the near future. Starting a family, a new business/self employment or a redundancy are prime examples.