Fix for 2 or 5 years?

[Cocopops0]

Hi all,

Ftb here currently in the process of buying a 2 bed house. My mortgage advisor has found a lender that will stretch on the affordability (single buyer on a low income) but the rate is 4.75%. I'm borrowing £116,000 with total amount of £371,000 to be repaid (yikes)

I thought I should fix for 5 yrs but now I'm not so sure. My mortgage advisor said I can fix for 2 yrs as rates are starting to come down but obviously it's a gamble as something could happen in the next 2 yrs and the rates could shoot back up again. On the other hand it would be reassuring to know my payments will stay the same for the next 5 yrs and I don't need to worry.

He is submitting the full application tomorrow but I have no idea what to do and struggling to make a decision. Any advice?

Just to add, the rates are slightly higher on the 2 yr deals.

I would do 2 personally but I can see the appeal of keeping your payments the same if that's important to you - eg if finances are tight. The risk is that likely rates will have come down and you will be paying more than you could have down (but obviously the converse could also happen).
All in I would still go for 2.

Look at Virgin money, they offer a fix and switch mortgage. You fix at a certain rate and if interest rates go down you can get out at no extra cost

If the mortgage is at the limit of affordability for you, fix for longer - yes you might miss out on a lower rate but the certainty is more valuable.

If you could afford for rates to go up, fix for shorter.

Don’t do anything on the basis that rates will drop down to the kinds of levels we’ve had recently around 1%. That was the anomaly and barring another crash we won’t go there again.

You’ve found a mortgage lender that will stretch some affordability calculations so it sounds like the repayments will be tight. If rates go up in two years, could you afford the property? Do you know what interest rate you are being stress tested to in the affordability?

We applied for a new mortgage 18 months ago with a rate of 4.17% and advice at the time was to do a 2 year fixed due to interest rates falling. They still haven’t fallen to a level that would beat that rate 18 months ago. We went for a 5 year fixed because we have childcare costs and know we need to afford the repayments. It was worth the risk of us potentially overpaying (because rates aren’t going to go back to where they were two years ago) to know that we could afford the repayment with childcare costs.

It depends how risk adverse you are. There are times in your life when you might be less risk adverse and willing to take a chance on a fixed of 2 years or even a variable. There are also times when you want to be more risk adverse and so it’s not just a case of overpaying, it’s the payment to ease your anxiety about being able to afford it for 2 vs 5 years.

Dc1 was asking me the same question this week. I said if it was me I'd go for two year fix because I think overall they're most likely to come down. However I also said you need to go with what your happy with and if your happy with a five year fix being affordable and understand over years 3-5 you may end up paying more than you could have been go for the five year fix.
Reassurance and feeling secure are also important.

Personally I would fix for 2 years but it all depends on your appetite for risk. I expect the interest rates to fall over the next 2 years but there are never any guarantees.

Personally I would be happy settling for 2yrs and see what happens later.

Don't focus on the total amount paid.
If everyone with a mortgage did that no-one would ever get a good night's sleep.
You are borrowing a large(ish) sum over a few decades, of course the numbers are going to stack up. What you don't know at this stage however is if you will make overpayments or even pay it off early (as time goes on, this gets easier and easier), both these things make a huge difference to the total paid back.

I think the other thing to consider is that usually with each new term, you pay a fee or have a fee added to the mortgage. Often it is £1,000 or £1,500ish. Obviously to shorter the term, the more frequently you would pay this. I am not good enough at maths to figure out fully what I am trying to say here but it’s also weighing up how much impact this would have, as currently 2 years fixed seem to be slightly higher % than 5 year.

we are soon to start a 5 year in December, but until that point we have “locked in” for a 5 year. If at any time between now and I think 2 weeks before the new term starts our lender reduces its rates, we can switch to that lower rate. Maybe check if your lender does this too

Potential price drops are already priced into the longer fixes. We fixed for 5 years for the certainty.

I have just taken a fixed for 5 years. I know I can afford the repayments for the next 5 years. Yes, there’s a good chance rates will come down in 2 years but then I’d have the hassle of securing a new deal - Personally, I’d rather stick with an amount I know is affordable for a longer period, even if I do end up paying more for the peace of mind.

Hasn’t your broker mentioned three year fixes to you? They exist.

You can get three year fixes. As per others, depends on your financial situation. If you could manage a hike in cost at the end of your 2 year fixed then go with that, if you couldn't go with a longer deal so you have the certainty.

MSE is thinking the BofE might make sn interest rate cut next month. However they don’t think it will make mortgages much cheaper. Assuming you cannot hang on, I’d probably fix for 5 years. You might well incur more costs after 2 years and 5 years of certainty means you know where you stand.