Beginner question about mortgage fixing

[Arrrghh]

Hi, I’m buying my first house. I’m getting a 90% mortgage, and I’m trying to decide whether I should fix it for 2 or 5 years.

On the one hand, the thought of interest rises terrifies me because my mortgage is v.big and I won’t be able to afford to keep paying it if rates rise by much. So, maybe fixing for 5 years is wise to give me time to get onto a higher salary (not that I will ever be a high earner, am public sector pay scale, I’ll max out at 50k) and for house value to increase.

On the other hand, in the short term, fixing for 2 years will give me lower monthly repayments and give me spare cash to do the house up and have a better quality of life generally (which I really want, esp after coronavirus and being stuck in a flat).

I really want to go for the 2 year fix and have extra in my pocket each month, but the worry about interest rates holds me back. The internet tells me that interest rates might go up in 2022?

What do you think would be wise in my situation? (I am speaking to a mortgage broker on Monday by the way but I just wondered what financially savvy mumsnetters think?)

How much is the monthly difference between the 2 and 5 year? If it’s a small amount I would lock in for 5. It’s really hard to know what to do though, we first did a two year with everyone telling us rates were due for a rise…and they didn’t. But we caved and did the next for a 5.

The 2 year fix is about £100 cheaper per month.

5 years is about 730ish and 2 years 640ish.
My net income is about 2500 so I can afford both, but almost all my savings will on the deposit. So I’m a bit nervous that I don’t have much of a safety net.

When we first bought our house 7 year ago, we took the 5 year fixed. Difference I think was about the same as yours but we just felt safer with a 5 year.
In these current times I'd still go for 5.

We did a 5 year fix for the stability. Are you paying a fee for the mortgage? You’d have to pay that again if you go with the 2 year - what might the overall total cost look like?

Could you do the 2 year but overpay up to the 5 year amount to be better off then?

@pitterpatterrain I haven’t actually applied yet so not sure which one will be going for. There might be a fee?

I think I could do the 2 year fix and pay the 5 year amount, can you explain to me what the advantage of that is? I’m sorry I am dyscalculic and am rubbish with this sort of thing .

Check out the Ts and Cs if you plan to overpay - fixed rate mortgages usually have some restrictions. With my 5 year fix, I can only overpay up to 10% of the outstanding balance each year without paying an early repayment charge, and any overrepayment has to be a minimum of £500 (i.e. I can't just increase my monthly payment by £100 each month which is what I think it sounds like you're thinking of)

For me, I like the security of knowing that my mortgage repayment can't change for the next 5 years so I went for a 5 year fix.

What rate are you looking at for the 5 year fixed? And what is the same lenders variable?

That's a big difference on the five year fix, rates would have to go up a lot in the next two years to make it worth taking it.

I don't think they will because there's a lot of government, business and personal debt out there so it would be too detrimental to the economy.

What other costs do you have? A £6/700 mortgage on a £2.5k income leaves a lot of spare income unless you have high childcare costs for example.

Agree about looking at variable mortgage deals, we've never fixed and it's been cheaper for all except a few months in the last 25 years. Certainty costs, as illustrated by the higher rate for the five year fix.

We did a 2 initially then when it was up moved to 5 but have now realised we want to move and are stuck (without paying a hefty get out fee) unless you know you won't move 5 is peace of mind whereas before you know it 2 years will be up!!

The phantom prospect of "interest rates are likely to go up some time in the next 5 years" has been there every year in the last 12years while I have been a mortgage payer but it never actually happens.

If it does happen it will be gradual so make sure you get a product that allows small monthly overpayments (I can see one PP above says their mortgage doesn't allow this but must do in my experience) and get the 2 year fix but set your monthly repayments to be £50 more than the amount specified by the bank. In the event that there is an interest rise between now and in 2 years time, the chances are that the change in repayment amounts when you get your next deal will be less than £50 anyway so your monthly budget won't be affected, and meanwhile you get the other £50 of the difference to keep and spend (or save) separately.

That’s a big difference between the 2 and the 5 year rates, and it’s certainly not typical of all lenders to have such a difference. You are either being offered a particularly low 2 year deal, or a particularly high 5 year deal.

If it’s the latter you might find with a different lender you can give you the stability of the 5 year fixed rate, with a deal closer to the 2 year option.

Definitely take the 2 year and either overpay £50 a month or if your deal doesn’t let you, save it and overpay at the end of the fixed rate. This will allow you to pay off your mortgage sooner. Martin Lewis website has helpful overpayment calculators that let you see how many months or years you have knocked off your mortgage.

I think you're better off with the 2 year fixed. Why pay more ? With Brexit and the pandemic I can't see interest rates rising. If anything I'd save the 100 difference between the 2 and 5 year deal either into a S&S isa or over pay the mortgage

Ooh thanks everyone. @KihoBebiluPute and @Undervaluedandsad thank you, that is really helpful, I will definitely ask my broker to look at this option with me.

I’ll also ask about the difference in rates, this is just what price comparison websites are throwing up but maybe she can help find me something better.

To be honest I don’t have that many outgoings, I’m just a single person looking after myself. But my current rent is 550 bills included (am in shared house), so 730 feels like a big jump when bills and council tax will be higher on top. I am saving at the moment but as soon as I pay my deposit and moving costs my savings pot will be empty so it’s making me nervous about what I can afford.

Thanks @Iboogy, that sounds like it might be my plan. I didn’t realise that if interest rates go up it would be gradual, and I hadn’t thought about the possibility of overpaying to offset this. I’m absolutely rubbish at maths, I don’t have the brain for this, so it’s really helpful to have some advice about the options to explore.

In your shoes I'd probably want to fix for five years. That's what I did when I bought my first place. It gave me certainty. Now I have more of a financial cushion if rates go up, we are going to fix for two years.

Just to add it's not necessarily 2 or 5. We went for a 3 year fix through our broker which was negligible difference monthly cost-wise to 2 years but will see us through most of the expensive childcare/maternity pay years when our income is less flexible. 5 years was too expensive.

Your potential mortgage is quite small monthly payments compared to your salary, so whatever you decide will be ok.

If your job is stable and you don't plan any life changes like children, I don't think affordability is a worry.

You'll still be able to afford to build your savings back up unless you have a spendy lifestyle that you won't give up.

Nobody can predict the future, so you have to be happy with what you choose

One thing to consider is when you might drop into the next LTV bracket which will bring things down again because you’ll be eligible for better deals. I took a two year fix on my first mortgage at 90% LTV and between the payments and house price rises, I could get a 80% mortgage at the end of those two years. When I moved into my next place we took a five year fix because we wanted more certainty over our outgoings when planning children.

Another thing to look at is to increase your deposit to reduce the amount you’re borrowing. My dd managed to increase her deposit by 3K, which wasn’t much in the grand scheme of things, but reduced her monthly payments by quite a bit. The bigger the deposit you can pay, the more cheaper mortgages will be available to you.

One other thing to consider with a two year fixed is that every time you remortgage you'll have 1000 arrangement fee. So if you went got a 5 year deal you'll only pay that once.

If you went for the 2 year deal you'd pay 1000 every 2 years which over the course of five years is around 3000. But if you went for the 5 year deal you'd pay 100 extra a month which is 6k over 5 years.

You get peace of mind with a 5 year deal but 5 years is a long time. You could meet a partner have kids and want to move in that time.

You're in a public sector profession. Doesn't get much safer than that job wise. You don't need the security blanket of a 5 year deal

Good luck

Interest rates are at a historic low point. in the late 1970's they hit 17%! Whilst I take PP point that they've remained stable, when they do change it will inevitably be upwards.

Also remember to take mortgage arrangement fees into account. If you fix for 2 years, you will have another arrangement fee then unless you stay on their variable rate.

The other thing to consider is the length of mortgage. A lower rate on a 25 or 30 year mortgage will be more costly in the long run than a 15 or 20 year term.

Finally look at the overpayment terms. Greater flexibility may be more expensive but could allow you to save in the long term if you have the ability to overpay each month.

Look at moneysavingexpert website for help understanding your options

If you fix for 2 years, you will have another arrangement fee then unless you stay on their variable rate.

Not necessarily. Most lenders will offer each fixed rate with a slightly lower rate and a fee, or a slightly higher rate with no arrangement fee. Which you go for should depend on the amount you are borrowing as the total you pay over the two years would be higher with the low-interest-and-arrangement-fee option if you are borrowing a relatively modest amount, but would be cheaper if you are borrowing more. Each 2 years (or more) you can ask your lender for their transfer deals to their renewal products for existing customers, and those will include both fee-free and with-fee options in the same way. We have renewed with the same lender 5 times now and never paid an arrangement fee or had to pay at anywhere near the lenders Standard Variable Rate.