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

[pigeon65]

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?

When we got ours years ago DP was self employed with just enough tax forms etc to get one, we got offered rates like this and we took the 5 year one so we felt safe and pressure off for afew years until renewal time, if that makes sense.
What’s the difference in payments?

I will go 2 years fixed at 3% you can reassess and if rates fall a bit your breakage fee will be less. We fixed for at 2018 for 5 years at 2.99% and rates are now as low as 2.2 and it will cost us around 3k to break out of the fixed rate. We will be paying around 100-120 less a month. Yes of course you get the 5 year security of no increases as well but 0.5% is a lot of money depending on the size of the mortgage.

Shorter term for FTB as hopefully you'll build up equity and might go to a better LTV bracket (lower interest rate) after the two yrs . Not an expert.

I’d go for the 2 year rate and look for a new deal when it’s up. 3.5% doesn’t seem good enough to be worth locking into.

Obviously have a think about where you’ll stand in 2 years time - will you be able to easily remortgage then?

Do you have plans in the next five years like qualifications that need to be pained for MSc etc or childcare? I was supposed to do another MSc and also have a baby within the five years. That was the reason for us choosing the term. So if you have things that need to be done within that timeframe then it is a better option to choose the five year term.

*gained not pained.

@Mishmased

Do you have plans in the next five years like qualifications that need to be pained for MSc etc or childcare? I was supposed to do another MSc and also have a baby within the five years. That was the reason for us choosing the term. So if you have things that need to be done within that timeframe then it is a better option to choose the five year term.

No qualifications to get, and we don’t have children.

Would like to have DC but I know how hard it can be to get pregnant at this age so would not want to base the decision on a child that isn’t even here yet IYSWIM!

@pigeon65 if you're free with no obligations for now I'd definitely go with 2 years. Makes more sense but what do you prefer? The security of 5 years or the risk of 2 years? You should have a bit of equity in two years time and property prices may also go up a bit.
I suppose job wise do you have a stable job are you contracting or permanent etc?

I was in your position a few years ago and chose 2% on the basis that that LTV would be healthier after those two years and I would have better choices.

At 1year11months it looked like the LTV wasn’t quite going to be low enough for better offers but I waited and at the 2year mark and with a new valuation it worked out as expected.

We went for a 5 year fix as we were planning on kids before the 2 year fix ended. The loss of income for a year while on mat leave + paying the highest nursery fees (there would be some free hours when baby turns 3) meant I wasn't sure on affordability at the two year point. Also by 5 years our LTV band will have improved, and no need to pay another product fee in a few years.

How old are you OP? When do you think you’ll want to start trying for a baby?

I’m in a similar position but I’ve gone for the five year fixed, as I’m 34 and the main earner, so didn’t want the mortgage renewal to coincide with an episode of maternity leave, etc.

Although I have managed to come up with the 15% deposit, and my interest rate is still 2.8%.

Jobs are very secure.

I am at the end of my childbearing years, let’s put it that way! I would have six months’ full pay and then... it drops but can’t remember off the top of my head what to.

@SatsumasOrClementines what would have happened if you’d got to the end of your two years and still hadn’t reach the next LTV stage? Could you have gone on the SVR for a few months before choosing a new fixed rate or does it not work like that?

What's the overall value that you're borrowing? I.e. Work out how much extra that 0.5% might cost. How affordable is your mortgage? Can you cope if in 2 years you need to pay 6%?

When we took out our first mortgage the security of knowing we had 5 years of known outgoings plus didn't have the faff or expense or rearranging a further deal was worth the extra the 5 year deal cost. This is because our mortgage was fairly small so the extra interest wasn't a huge amount and we were going to overpay from day one.

@pigeon65 if you get to the end and don't like the rates your bank is offering you can switch to a different bank as it will always be lower than the SVR option. Only thing with switching to another bank is you have to pay solicitors fees whereas if you stayed with your own bank you don't have to.

Also you can take the 2 year and depending if your bank allows it you may be able to over pay up to 10% of your balance and that will build up equity quicker as well.

With regards to kids it's more to do with after mat leave maybe dropping down to a three day week, expensive childcare affecting affordability. So fixing for 5 years means baby will be doing free 30 hrs by the time of renewal all things going well.

In our case I'm due in 4 weeks and by the time our fixed period is up baby will be 2.5 years.

Thanks @LesserBother I will do those sums.

It’s a strange one as our broker seems horrified at the idea of a 5 year fix! She says that because the 90% LTV rates have increased so much over the past year that it wouldn’t make sense to lock in for five years at such a high rate. I have mentioned my two concerns, namely:

1. that I may be on maternity at the end of a 2 year fix, would this be an issue

and/or

2. As we are in a pandemic house price bubble now so buying at the top of the market, what if house prices don’t continue to rise and so in 2 years’ time we are still not down to a 85% LTV

But she sort of brushed these concerns away.

The difference between the two options is an extra £100 a month.

9 years ago our 5 year fix was over 5% interest with a 20% deposit, so 3.5% sounds quite attractive!

I'm not sure I follow your brokers logic, surely if fixed rates have gone up over the past year it's just as likely they'll be even higher after 2 years rather than come down again?

@SatsumasOrClementines what would have happened if you’d got to the end of your two years and still hadn’t reach the next LTV stage? Could you have gone on the SVR for a few months before choosing a new fixed rate or does it not work like that?
That’s a good question. I would assume yes but I would put it to your broker/mortgage provider to be sure.

@LesserBother

9 years ago our 5 year fix was over 5% interest with a 20% deposit, so 3.5% sounds quite attractive!

I'm not sure I follow your brokers logic, surely if fixed rates have gone up over the past year it's just as likely they'll be even higher after 2 years rather than come down again?

I know! I was confused too.

It’s such a difficult decision and I feel like whoever we choose will be the wrong one

Whichever!