2 year fixed mortgage @ 3% or 5 year fixed @ 3.5%?

[pigeon65]

I have posted this in property but realised it might be good to post in Money Matters too!

It's not the best time to be a house buyer who only has a 10% deposit as the banks are skittish, but it is what it is.

If only I had been in a position to buy 18 months ago!

Sadly there is no chance of raising the deposit to 15%, so I will just have to make the best choice out of two 'not so great' choices.

WWYD?

I wouldn't fix at all

If you fix, go for the lower option. If it's your first mortgage and you only have 10% equity, the percentage should reduce in 3 years when your equity increases. Our first mortgage was around 3.9% and then the next rate was about 1.5% which massively reduced payments (well in our case, the term).

@FartleBarfle

If you fix, go for the lower option. If it's your first mortgage and you only have 10% equity, the percentage should reduce in 3 years when your equity increases. Our first mortgage was around 3.9% and then the next rate was about 1.5% which massively reduced payments (well in our case, the term).

This is what’s worrying me - that house prices are currently at a peak, an artificial bubble, thanks to the stamp duty holiday. I’m concerned they’ll fall over the next two years.

@pigeon65

What sort of house are you buying? If it's a FTB type or good investment opportunity it should be impacted less by any potential market reduction. If the market contracted slightly, say 10% how much would is knock off the price of your house? If we had a 2007 crash it could still be lower in value after 5 years anyway. You just don't know, and you never do.

My view is only that 3.5% seems high, but if you can afford the repayments and are absolutely sure you want to live there for 5 years (look into any redemption fees as we got stung by this when we last moved and paid a £4k fine to move two months before the end of the term as we couldn't port our mortgage), then go for it. I don't think anyone can tell you what's best for certain. There are still people that didn't freeze a rate in the 2007 crash are still screwed by that (mortgage prisoners).

If it was me I would freeze for three years and do my utmost to overpay every month (also look up Martin Lewis overpayment calculator to see exactly how much you'd have paid off after 3 and 5 years, so you can see the impact of overpaying on both options). After three years you should own a larger proportion of the house and be able to access better rates.

I assume you are speaking to an independent financial advisor at the moment? This is vital to make sure you make the best decision and consider all the options.

By the way I am basing my decisions on my past experience and can no way predict the future of the market or rates.

I would go for 5 years so you have stability, can budget, maybe look at additional income like letting a room if you don't have dc. In 5 years you should have built some equity. Try to put an extra 100 on mortgage every month, it will make a big difference. The next 5 years may be lean but they can be more predictable and leave you in a good place 5 years from now. Also make sure you have that emergency fund in place.

Congrats!!!

I would go for 5 year fixed. You need to think about how much extra you will have to pay if interest rates increase by say, 1% in the next 2 years.

I also don't think that 2 years is long enough to build up much equity in the house. At the start of a mortgage, a high proportion of your monthly payments go on interest (and this proportion decreases the more of the loan you pay off). I fixed for 5 years at 2.1% last year and my monthly payments are around £850. Almost £350 of this is interest, so the balance goes down very slowly to begin with!

It is a house that we would be very happy to live in for a long time (at least five years).

We don’t have children yet as the time has never been right, which means we would have to get cracking on that front and so in two years’ time I may very well be on maternity or at the end of my maternity leave and so we would be re-mortgaging at that point. I worry that this would be an issue (especially if house prices has contracted!) but our mortgage broker says it wouldn’t be.

It's shouldn't be a big deal if you stay with your current provider as they will just send you a renewal quote. But I did have my application referred due to impending maternity the first time (6 years ago now so I hope times have changed).

If you have a house and are happy to stay for 5 years it sounds like a good idea to fix now as at least you'll know what you'll need to pay for the duration. My first mortgage was about 108k and in the first two years we paid 8k off it. Although the interest is front loaded, you should still make a little dent in the first few years - again if you look at Martin Lewis he will show you how much you will have paid off each year. You should also have the opportunity to port your mortgage if you do decide to move house. We couldn't as ours didn't do a help to buy mortgage which we needed for our second move.

I think 5 years fixed.

For me it depends on the relative costs of the mortgage - what are we talking about?

In your situation I’d be inclined to do a shorter fix on a lower rate and overpay by at least the difference between the lower and higher rate to reduce interest payments and increase your equity before you need to remortgage. But a lot does depend on the relative numbers - if overpaying won’t get you close to the 15% band in two years you might be better with the 5 year fix.

@JassyRadlett

For me it depends on the relative costs of the mortgage - what are we talking about?

In your situation I’d be inclined to do a shorter fix on a lower rate and overpay by at least the difference between the lower and higher rate to reduce interest payments and increase your equity before you need to remortgage. But a lot does depend on the relative numbers - if overpaying won’t get you close to the 15% band in two years you might be better with the 5 year fix.

The relative costs would be about 1450 for the 2 year fix and 1550 for the 5 year fix.

With the half trillion of new money printed to fight covid, i think we will see significant asset price inflation, and consequently a hike in interest rates to tackle it. If you think your jobs are reasonably secure i would go with the 5 yr fix and hope things have settled down by then.

Thank you @Krieger

I personally don’t think interest rates are going anywhere in the foreseeable so for that reason I would go for the lowest rate I could find for 2 max 3 years with no upfront fees.

We are buying with 10% deposit and our broker has advised going for two year fixed with the plan to switch to get a better rate in 2 years time