Would you go for a 2 or 5 year fix right now?

[Weighly]

I have friends who have bought recently and went for different options, and they all make good points about why they went for one over the other. So it’s really hard to decide!

We are first time buyers. Looking on some banks’ websites it seems that a 5 year fix would be about £60 a month more than a 2 year one.

What would you suggest right now?

I've never (personally) known a rate change be regarded as a remortgage, the house needed to be valued in order to give an accurate LTV but we werent financially reassessed which is what a remortgage would do.

I’m about to exchange in next couple of weeks and fixed for 5 with 85% luv got a good rate but we are going to extend and renovate think I’ve probably gone wrong and should have fixed for 2 years as will have a lot more equity in the house after refurbishment hopefully anyway!
Is it to late for me to change this to a two year fixed and should I do so?

@Leigh8721 in your position I'd fix for 5 years, 85% LTV is likely to be an ok rate and as you're already at that level I'd prioritise stability over the next 5 years personally. What is the rate like? How does it compare to the rates on nearby better LTVs? There's usually not quite such a stark difference as there is from 90% down.

Assuming you're not needing to release equity for the renovation work.

We now fix for 2 years - and we are 9 years into owning our property. For us this has meant ever lower interest rates. We fixed for 3 years at the start of the mortgage for increased certainty and in hindsight that wasn’t cost effective. We have always factored in any fees as part of the overall cost of the mortgage and it has still worked out cheaper doing this.

We renovated which significantly increased the LTV as well as overpaying. We started with a 10% deposit and 90% LTV and are now down to 20% LTV.

For us the low rates and flexibility works but we could afford our mortgage at a higher interest rate so we can take more risks. If I was financially constrained by the mortgage I would fix for longer.

Hi thanks for response we got offered 2.48 2 years was 1.86 not much in it with regards to payments. We won't need to release equity just thought in two years maybe we can get a way better deal

This is such a tricky decision! I appreciate every response as you are all giving me lots to think about.

If we fix for two years then in theory, after those two years, we will just about come down to a 85% LTV.

However, isn’t that then gambling that prices won’t fall?

I am pretty sure we are buying at the top of the market, and I have a sneaking suspicion we have overpaid a touch (but we have made peace with this for myriad reasons, and we’re not looking to move for a long time).

So, if the value of the house falls over the next two years then we wouldn’t be able to get 85% mortgage rates.

And by that time, who knows if the base rates will have risen?

Therein lies the gamble, I'm personally relatively confident in my area despite having bought a new build, it's held out very well and is "up and coming" with lots of development in the area. I think prices might stagnate but if the government continues to prop up the housing market I can't see house prices going down much if at all, I think stagnation or very gentle rises. But I have absolutely nothing to qualify that other than what I think ha! I don't think you need to worry about rate rises in the next 2 years personally, not much anyway. Your rate is already quite high (for the time) but it depends on your risk appetite. If you have no desire to move in the next 5 years and are happy with how much the mortgage costs, fix for 5 years for piece of mind which it itself is worth the extra cost to some people!

The other option with the 2 year fix is to over pay in order to build equity to help get to the next LTV bracket, if you look at a mortgage overpayment calculator it can be quite surprising how much impact a small regular overpayment can have on the mortgage over all.

We are going to TTC over the summer. So in 24 months we would potentially be looking at nursery fees for a one year old. Which might not be what you want when you’re just about to remortgage?

Yes - but if you have more than one child you'd end up in this place anyway, I suppose? It might be more problematic if you're trying to remortgage whilst on maternity leave or if you need to reduce your hours at work. So it is a consideration.

However, with the LTV in mind, I think if I were you I would take the 2-year fix initially, do a mixture of saving towards maternity leave and overpaying your mortgage as hard as possible before you have a baby, to make sure than you can get under that 85% LTV, and then fix maybe for longer at that stage until you can get out of the exorbitant childcare years.

In our current house we were already under 60% LTV so we took a 2 year fix, then a 3 year, and have remortgaged this time for 5 years because mid-summer last year almost everything about both our jobs looked potentially dodgy and we wanted to make sure we weren't rolling the dice at a remortgage coming at an inopportune moment!

In our first property, which we bought with just a 5% deposit, it all felt ruinously expensive until we got under 85% LTV and that happened within the first 2-year period. We had no plans to TTC or anything, and no dependents, so in that timeframe so we could afford to gamble a bit and take the risk that we'd hopefully be better off against a possible interest rate rise. But also the property market was still rising rapidly then and we were in a hotspot location.

There's no universal answer but I think when you don't yet have a family you can more easily gamble a bit, because cutting back on expenses is easier.

We are FTB too and debated the same thing, we worked out that after 2 years we'd have enough equity in the house to get at least 80% LTV (currently slightly below 85%) which means we'd get a better rate offered to us.

For comparison, we have been offered a 2.7% interest rate at 85% LTV which seems significantly lower than you at 90%

Interest rates may increase a minimal amount over the next 2 years, but look at the historical base rate- its barely shifted in the past 10 years so I wouldn't worry too much about that.

I would go for a 2 year. Interest rates aren’t going to be rising much at all anytime soon, even if they did after the 2 year it will be outweighed by the likely reduction in LTV.

Love your user name @optimisticpessimist01, this is actually me right now! So you’re not worried about house values dropping in the next two years?

@Weighly

Love your user name *@optimisticpessimist01*, this is actually me right now! So you’re not worried about house values dropping in the next two years?

haha

Not concerned because even if they drop significantly enough to seriously affect re-mortgaging in 2 years, I doubt it would've recovered by the 5th year too so we would be up the creek regardless!

House prices usually crash during a recession which has had a serious, prolonged, negative impact on the economy, and whilst we have definitely been hit, the government will be desperate to stimulate economic growth. People are also ready to spend money and a lot of people have accumulated additional savings to help with economic growth too. The banks have been (unusually) helpful too by offering mortgage holidays and been more strict on their lending criteria to avoid people being unable to pay their mortgages.

Plus in the optimistic part of my username- what's the point in worrying about something that we have absolutely no control over?!

Always go longer. If interest rates drop you can renegotiate your mortgage, sometimes without even fully refinancing. If interest rates go up you are protected.

I've just renewed my mortgage from a 2 year fixed to five year. The interest rate is really low at the minute.

Worrying over something I have no control over is what I do best!

It’s tricky because it does depend on your circumstances. For comparison of situations, we went for a 5-year fix at 1.39% (HSBC), arranged by a broker, because this is our forever home (well, until any eventual downsizing) and we were borrowing extra to renovate and given my husband’s income flexes a lot it was much more helpful for us to have the certainty for longer than to be at risk in 2 or 3 years again. This was at 60% LTV. If you’re not using a broker I’d highly recommend it - ours was brilliant and got us the deal while I was on maternity leave (so overcoming mat leave and the prospect of additional childcare costs) and while my husband’s income had taken a temporary hit during the height of the pandemic. It’s given me great peace of mind to know that’s it for 5 years.

BUT - this is the first time I’ve gone for a 5 year fix. If the rate has any early repayment charges or isn’t portable do think about whether you might find yourself moving and bear in mind the urge to move may come on more suddenly than you think - I’ve been hit by early repayment charges before. I thought I was settled in my last house even though I didn’t love it and it wasn’t a bringer of joy - until I saw a house for sale that we didn’t end up buying but it sparked something I hadn’t anticipated feeling at all.