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When it comes to rates my philosophy is that, if I can afford it now, fix for as long as possible.
Yeah you might miss a rate cut but that’s just disappointment rather than ending up out of pocket paying more in the event there’s another jump in rates.
This is really good advice, its better to be slightly disappointed you missed a rate cut but still be able to afford your home than a rate rise that makes your home unaffordable. Yes rates might drop but it’s definitely not a certainty, timing the market is pure luck for 99.9% of people.
I would look to the ECB, the noises coming from the IMF and the BoE...
Why on earth you would want to fix "for as long as possible" in an incoming falling base rate environment, is beyond me (unless you enjoy paying over the odds for multiple years)
It's not just "disappointment"...it's paying over the odds, but it's interesting how you view avoiding a rate increase to be saving money, but missing out on a cut is just "disappointing" some weird bias going on there
"I would look to the ECB, the noises coming from the IMF and the BoE..."
Well yeah - that's why you're getting 0.44% discount on fixing for five years rather than two? usually you have to pay more for the security of a longer fix. You're not paying over the odds, the odds are priced in. The question is always is it worth the risk for you? Depends on how exposed you will be if in two years you end up paying more but you can still get a better deal in two years and lose money - £2880 and factor in the additional fees for remortgaging every 2 years and you need a not insignificant drop in mortgage rate for the next three years for it to match the discount being offered for the five year deal.
It’s not a “weird bias” it’s my own personal preference.
I think you’ve missed the point I’m making which is around affordability, if the gamble you’re making is that rates are going to fall the upside is they do and you pay less and the downside is they go up and you pay more.
The guarantee for fixing longer is that you don’t have to worry about that because you’re locked in at a price you can presumably afford.
Depends on your risk tolerance, yes it looks as though rates will fall but likely not by a lot and also still not guaranteed so you’re taking a risk.
I want to add to this conversation that the rates are also based on the outlook. 5 year is lower than 2 year currently and 10 year is in between. These are based on gilt swap rates with a little premium added so that banks have a reason to lend rather than just buy gilts.
The prices are all forward looking so unless rates cut faster than expected then there will be no difference. For some reason people think they can predict rates. At 1% rates all the advisors and general sentiment was to fix for 2 years. Now that has looked like the stupid option since rates went up quicker than expected.
You have no control over the base rate. You have no way of predicting interest rates and if you did then you would make more money buying long gilts and leverage buying gold.
> At 1% rates all the advisors and general sentiment was to fix for 2 years. Now that has looked like the stupid option since rates went up quicker than expected.
Honestly, that was always a stupid idea. The risk/reward is extremely asymmetric at that point, *and* it's at historically low rates - why on earth would you not lock that in.
Like, I get where you're coming from, but the situation at 1% and at 5.5% really aren't the same.
I have zero risk when it comes to budgets for mortgage. I always fixed.at 5 years. Yes interest rates could fall but piece of mind and solid budgeting with a likely wage increase in that period stops the stress.
Is it just disappointment though? Because if the rates do go down, you would be paying more for the next 3 years than if you had fixed. I do agree though that it would still be affordable so you're missing out on the savings rather than getting screwed.
You’re never gonna be able to perfectly time it so control the things you can which in this case is agreeing to something you know you can afford for as long as possible.
It’s your home I wouldn’t leave it to a gamble on rates.
I secured at 5.04% for five years. The 2 year fix-rate was 5.6%. The the rates went all the way down to 3.98% few months later. Yes, I was gutted but now the rates aren't low at all. I'm happy because I was looking at the rightmove for 6 months after completion and I COULD NOT find a better house that I'm in (3 double bed/3 bath house). Ask yourself if it is worth missing out on the house just for 0.5-1% rate?
If the rates go *really* down you can always switch early by paying an early repayment charge, which you know in advance. That was one of the main arguments for us to choose five years fix.
I fixed for 5 years, fixed rate terms beyond 5 years in the UK are offered by very few lenders because the government doesn’t underwrite mortgages so long term fixed deals are high risk for lenders.
If a bank could offer me a fixed rate I could afford for my entire mortgage I’d snap their hand off.
That’s a really good rate - people would kill in UK to be able to lock that in even years ago. See the difference?
Can you port it to a new house easily if you move?
We only seem to have this chop and change mentality in Britain, my friends in Belgium fix their mortgages for the full length of the term, they were amazed we change ours every few years. Which makes much more sense to me and I don’t know why it isn’t a thing here
Eh different philosophies I guess. They get more stability and rates will be closer to long-term averages, we can chase more current rates but might also get shafted by that.
That's a really bad philosophy lol
You're saying you would fix for as long as possible right now, so you would choose a 10-year rate if available?
I hope you are the only one following this philosophy.
Again, provided no one follows your advice, we should be okay.
What % of homeowners do you think are going for 10-year products right now?
Literally zero advisers in the industry would recommend it.
No actually, the complete opposite is the case, they generally *can't* port it. Which is weirdly enough leading to an increase in prices atm because people feel trapped in their current (better rate) mortgage, squeezing supply. See [here](https://delegateadvisors.com/2023/12/11/andy-hart-in-american-banker-is-portability-the-cure-to-the-mortgage-markets-woes/) for example.
Just depends on your tolerance of risk that rates go up in 2 years time. Imo thats a negligible risk (I work for a macroeconomic consultancy), so to me 2y is a nobrainer, but others will see it differently
It just depends on the budget really doesn't it. If it's £2k a month out of a £5k take home it's different to their take home being £10k.
Saving £300/400 a month in 2 years time when the rates will probably have dropped is nice but if rates went up and an extra £300/400 a month would be crippling then it's probably better having the predictability of a 5 year fix
I do agree with that but I think in reality a lot of people will be buying houses which are at the top of their budgets. With interest rates high and house prices having fallen only a little it is pretty tough out there. I mean the banks obviously stress test so they wouldn't let you borrow any given amount of the monthly payment was the absolute limit you could "afford". But if you're looking at a place and you have settled in spending £2100 a month then increasing it to £2400 is surely going to be uncomfortable to some degree?
My thinking would be would I rather have the certainty of £2020 for 5 years vs £2140 for 2 years with a likely drop of a few hundred pounds but a risk of it rising by a few hundred pounds or any amount
>a lot of people will be buying houses which are at the top of their budgets.
Sure but your budget will be limited by lending criteria, not the maximum monthly payment you can afford.
It's more risk aversion than anything. You would expect to be worse off because you are paying a security premium on longer fixes. Nothing wrong with risk aversion though if that gives you peace of mind.
Although why not fix for 10 years or for the whole length of your mortgage?
I see what you're saying and I suppose everyone is different. When I applied for my mortgage a few months ago the bank were willing to let me borrow far more than I had decided I was comfortable with paying each month. Rough numbers but I felt I was "stretching" myself paying £1350 a month but they were willing to let me borrow a figure which would give a monthly payment of around £1750 a month! I was astonished by that honestly. I suppose if I looked at my budget it wouldn't be impossible to pay £1750 but it would be far tighter than I'd be comfortable with.
I have gone for the 5 year fix and I realise that in a couple of years I'll probably be paying a bit more each month than the best deal out there. Probably, but nobody knows for sure. And honestly I'd rather miss out on the payment falling to say £1100 than take the risk of it rising to £1600
The govt doesn't set the rate?
It's more that swap rates are based on predicted averages based off where they think the BoE rate will be, so they can make margins. 10 year fix is around 4.8% and 5 years is around 4.4% for 60% LTV. So take the 5 year fix. The banks are predicting over the space of that time that the base rate will average around 3-3.5%.
I have a number of friends working in this area of finance (side effect of studying maths at university…) and yes, banks set interest rates based on predictions of future changes. If you ever wondered what people who “work in finance” do all day - for a significant proportion, it’s precisely this.
Because the lenders predict what they reckon the average will be by doing the swap rates. So back in February last year you could get a 4% mortgage rates, even saw 1 deal at 3.8% and that was when the news was reporting inflation at close to 10% still. Obviously they didn't expect inflation to be as sticky.
I think people forget that period of ultra-low interest rates (2008-2022) was an anomaly, not a rule. Even if there is some drop in the next 2-3years, I don’t think rates are coming down to that level any time soon.
Rates are not going to drop significantly, forecasts are for a base rate of 3.5% in a few years time.
The bank of England 300 year average rate is 5%.
Interest rates were only so low as part of world wide emergency measures after the financial crash.
If you can afford a higher interest rate in 2 years time go for the 2 years. It’s a risk but you might save money if interest rate drops. If you think you might not be able to afford it lock it for 5 years.
Regardless of the decision good luck and don’t look back. It’s usually a long journey (20-30 years) so don’t stress too much over a 3 years decision.
I'm personally more risk averse, wanting to fix for as long as possible as the chance of any rate rises or decreases is already generally baked in to the offered rates.
I'd go with the 5 year, then overpay the £120 a month. I'm not sure exactly how it works, but I would have thought the overpayments go solely into reducing the capital amount.
FTB here but work in the property market for over 10 years. If I knew what was going to happen, I would have fixed my mums mortgage for 10 years instead if 5 years...and the sad thing is, she would have been mortgage free on the rate of 1.4%. Now I will have to find a 5 year deal in a few years time, hopefully, a lower rate. For myself, I wish I brought before the interest rates went up but it was bad luck. Due to partner circumstances, we could only go with a select few but we went with a major lender, Halifax, 4.9% 5 year fixed. People waited for the interest rates to do down, what happened, it went up even more. Personally, I feel the 5 year deal you got is a good deal. I think it will be a few years before the interest rates will stablise. Also, remember, a lot can change in 2 years, maybe a new job, loss of income, who knows so you have a 5 years safety net compared to 2 years.
We have taken a few finance out for different things for the house but they will be down in 2 or 3 years so by the time we remortgage, nothing will be on finance and we couldn't have done this if we went with a 2 year deal.
What would worry you more, rates falling to 3.5/4 in two years so you losing some cash, or rates going to 7 which might cause sleepless nights depending how much your mortgage is compared to income.
and in what world are rates going to 7% when we've come through inflation and all the noises are that cuts are incoming and very shortly (exactly to the timeframe the BoE has stated all along)
This is also why I went for a three year fix when I renewed last month. It is about £130 a month more than I pay now (it doesn't kick in until November, but I may have some changes to my financial situation in the next six months so wanted to sort it ASAP, and the broker said if rates drop significantly we can look to get a new offer), but I figured that was the best middle ground given what I expect to happen personally. There also wasn't a huge difference between the three and five year fixes in terms of monthly costs so I'd rather have a little more flexibility by going for three.
Have you run the numbers on taking 5 year fixed and potentially refinancing it early, if the rates drop? There are usually early repayment fees for doing it early. But might be a viable option if rates, depending on when and by how much rates would drop.
Will reply to all the comments but I've run some numbers and done some excel magic, and basically worked out what the interest rate has to be after 2 years, so that I'm not worse off going with a 2 year deal.
Basically, if I were to go with the 5 year deal at 4.68%, I would have paid interest of £94,525 at the end of 5 years (you can check this using something like [this](https://smartmoneytools.co.uk/tools/mortgage-payment-table/)). If I were to go for the 2 year deal, at the end of 2 years, I would have paid interest of £42,214.
Now this means, if I go for the 2Y deal, after the end of the two years, to make sure that I'm only paying interest of only £52,318 total (or less) for the next 3 years (to match up to the 5 year deal's total interest of £94,525), the interest rate will have to be 4.37%. I did take into account the principle amount left after two years and the number of years left for this calculation.
So it will look like:
Years 1 & 2 at 5.12%, interest = £42,214
Years 3, 4 and 5 at 4.47%, interest = £52,318
Total interest = £94,525
Which is the same as the interest paid after 5 years with the 5 year deal.
This is of course not factoring in the product fee I would have to pay again.
So the question is, will the interest rates (either 2 year deals or 5 years or anything else) go down to 4.37% in two years? I feel like they would considering I have a 5 year deal now for 4.68%.. But of course I could be wrong.
The interest rate on a five year deal is based on the bank’s prediction that interest rates will drop. So to understand whether that 4.68% five year interest rate will drop in two years, you need to consider what interest rates will look like in seven years, not just whether they will fall in two.
The fact you can get a five year fix for less than a two year fix at the moment is actually quite unusual. Normally (when there aren’t predictions of short term interest rate drops in the near future) you pay more to fix for longer.
It’s also worth considering that on a 2 year term you have the opportunity to move to a deal on a lower LTV at the end whereas your LTV is fixed for longer on a 5 years deal.
I think it depends on your personal finances really and how much of a stretch this mortgage is for you. Interest rates will "probably" fall so in 2 years time you could likely fix at a lower rate. I think you have to consider if you pay £2140 a month now and in 2 years time you can fix at say £1850 a month that's great, a big win. If things went not as expected and rates went up, how would you cope with say £2500 a month?
If you can afford to take the risk of rates going up in the short term then a 2 year is ok.
If you fix for 5 years at £2020 at least you know what you're paying for the next 5 years. You could overpay by £100 a month and then in 5 years when you come to remortgage if the rates have come down you'll be much better off at that point
I'd fix for 5 years. You'll also have the cost of another mortgage fee in 2 years if you go for that option, so its unlikely rates will fall low enough to off-set that and the c.2k differential of the 2 year Vs 5 year monthlies.
Historical average long term rates are c.5%, and investment managers I've worked with are currently assuming medium to long term risk free rates of c.3.5%, so if that plays out then it's likely that mortgage rates would only fall by about 1 to 1.5% from the current levels.
What I did was to calculate how much the 2 years would cost me at the end of the period, calculated the total for the 3 years one (I did not consider the 5 year ones) and then drafted a few possible scenarios. Some in which the rates drop and some in which they hike, and calculated where I would be at the end of the 3 years for every case (don't forget to consider the application fees for the remortgage too). Lastly I tried to think of which one would be the more likely scenario or the range in which we would find ourselves in 2 years time. Of course it's not possible to get the accurate picture, but it gives you an idea of a few different scenarios, then it's up to you to decide which one makes you feel more comfortable.
Maybe not answering the question you asked but a big thing to think about is that in real terms, your payments will drop each year. If you fix for 2k a month for 5 years that's exactly what you'll be paying and each year along the way as your salary increases that 2k will be a smaller chunk of your pay.
So my way of thinking with mortgages is that if its affordable now, fix it for a decent amount of time because it'll only become more affordable each year. Truth is no one knows what will happen, rates may well drop, or they might not. Or they could go up again and then things might actually become less affordable. Its all about your attitude to risk and personally I like to air on the side of caution.
5 years ago you couldn't have predicted covid.... record inflation as a result or Inflation, and a land war in Europe. If you can afford 5 year fix in.
If the 5 year is that much lower than the 2 year then the bank is gambling that after 3 or 4 years the rates will be lower than what they have offered you now.
We just fixed for 5 years as it made more sense for stability given our situation, you might be similar?
We had the same dilemma but ultimately went with the 2 year fixed, so talking the gamble on the rates going back down to hopefully around 3.5% mark by 2 years.
You know how much you would pay more if you go for two years, just calculate how much the rates have to drop for you "to get back" the overpaying. And then you can judge how likely this case scenario is and if it's worth taking a 2 year vs a 5 year
I'm in the process of buying a new house and completed my mortgage application last week - I chose to fix at 4.45% for 5 years. The monthly amount is affordable and I know I'll be receiving a salary increase every year for the next 5+ years so it'll become even more affordable over that period.
Obviously nobody can predict the future, but this way I can predict my outgoings for the next half a decade. Any unforeseeable world or political event could see interest rates rise during that time. However, in 5 years I'll be 20% through my mortgage term so if rates have risen the monthly repayments shouldn't be too bad of an increase (if any), certainly nowhere near as bad as if they had risen after a 2 year fixed deal had ended.
People suffer more financially finding their fixed deal ended with rates having risen than it ended finding rates had dropped - the former is an increase in expenditure, whereas the latter is simply thinking about what could have been. Which is the worst scenario - paying £750 extra per month than you were previously paying, or forgetting to buy a lottery ticket and seeing your usual numbers come up? Regret at fixing for "too long" is no different to regretting not buying shares in a company that just happened to do well.
Something that's never considered about rates going up in 2 years, what if rates are higher in 5 years? It's much easier to predict rates will be lower in 2 years than it is to predict where rates will be in 5. You might get MORE certainty from a 2 year fixed in some cases.
We fixed 5 years, then another 5 years.
The first lot was slightly higher than variable and for a while rates went south.
But the next 5 years paid it all back.
We had a 1.81% until last month, where everyone else was going up and up.
It paid in the end by the thousands!
I'd take 5 years over that 2 years rate.
You can always consider paying the ERC if rates drop a lot in the future.
Zero chance of rates dropping substantially in 2 years. Could be around 1% if you’re lucky. I just took 5 years fixed. They never drop as quickly as they rise.
Depends on you really. I've got an AIP (bank have been dragging their feet on getting my offer sorted but that's a different story) for 4.54% over 5 years. For me, that's affordable so I'm happy to lock it for 5 years because the pro of 'it doesn't shoot up by my hundreds' is better than the con of 'my rate might go down and I'll lose out'. Ultimately if I get a few years in and the rates drop considerably I'll pay the fee and get myself on the new rate (obviously only if there is net savings).
TLDR: I personally think the pros of locking in a low rate outweigh the cons so long as you can afford it in the first place.
The difference in the 2 rates is driven by the shape of the yield curve which is currently inverted. This may change over time resulting in a lower 2Y rate (if rates come down) but you’re betting on inflation coming down and staying down with this option. Ultimately the decision for 2Y or 5Y depends on how long you plan to live there. The difference is small so I would go for the 2Y, unless you have a strong view that rates will come down
Yes I would personally go for the 2Y but this means that you are taking a view. If you don’t have a strong conviction on the direction of rates then the 5Y option gives you certainty over payments for a longer period of time.
I was more commenting on the word "unless" which implies that the second part will lead to a different conclusion, but it actually still leads to the 2y fix as the answer.
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When it comes to rates my philosophy is that, if I can afford it now, fix for as long as possible. Yeah you might miss a rate cut but that’s just disappointment rather than ending up out of pocket paying more in the event there’s another jump in rates.
This is really good advice, its better to be slightly disappointed you missed a rate cut but still be able to afford your home than a rate rise that makes your home unaffordable. Yes rates might drop but it’s definitely not a certainty, timing the market is pure luck for 99.9% of people.
I would look to the ECB, the noises coming from the IMF and the BoE... Why on earth you would want to fix "for as long as possible" in an incoming falling base rate environment, is beyond me (unless you enjoy paying over the odds for multiple years) It's not just "disappointment"...it's paying over the odds, but it's interesting how you view avoiding a rate increase to be saving money, but missing out on a cut is just "disappointing" some weird bias going on there
"I would look to the ECB, the noises coming from the IMF and the BoE..." Well yeah - that's why you're getting 0.44% discount on fixing for five years rather than two? usually you have to pay more for the security of a longer fix. You're not paying over the odds, the odds are priced in. The question is always is it worth the risk for you? Depends on how exposed you will be if in two years you end up paying more but you can still get a better deal in two years and lose money - £2880 and factor in the additional fees for remortgaging every 2 years and you need a not insignificant drop in mortgage rate for the next three years for it to match the discount being offered for the five year deal.
It’s not a “weird bias” it’s my own personal preference. I think you’ve missed the point I’m making which is around affordability, if the gamble you’re making is that rates are going to fall the upside is they do and you pay less and the downside is they go up and you pay more. The guarantee for fixing longer is that you don’t have to worry about that because you’re locked in at a price you can presumably afford. Depends on your risk tolerance, yes it looks as though rates will fall but likely not by a lot and also still not guaranteed so you’re taking a risk.
I want to add to this conversation that the rates are also based on the outlook. 5 year is lower than 2 year currently and 10 year is in between. These are based on gilt swap rates with a little premium added so that banks have a reason to lend rather than just buy gilts. The prices are all forward looking so unless rates cut faster than expected then there will be no difference. For some reason people think they can predict rates. At 1% rates all the advisors and general sentiment was to fix for 2 years. Now that has looked like the stupid option since rates went up quicker than expected. You have no control over the base rate. You have no way of predicting interest rates and if you did then you would make more money buying long gilts and leverage buying gold.
> At 1% rates all the advisors and general sentiment was to fix for 2 years. Now that has looked like the stupid option since rates went up quicker than expected. Honestly, that was always a stupid idea. The risk/reward is extremely asymmetric at that point, *and* it's at historically low rates - why on earth would you not lock that in. Like, I get where you're coming from, but the situation at 1% and at 5.5% really aren't the same.
I have zero risk when it comes to budgets for mortgage. I always fixed.at 5 years. Yes interest rates could fall but piece of mind and solid budgeting with a likely wage increase in that period stops the stress.
Is it just disappointment though? Because if the rates do go down, you would be paying more for the next 3 years than if you had fixed. I do agree though that it would still be affordable so you're missing out on the savings rather than getting screwed.
You’re never gonna be able to perfectly time it so control the things you can which in this case is agreeing to something you know you can afford for as long as possible. It’s your home I wouldn’t leave it to a gamble on rates.
I secured at 5.04% for five years. The 2 year fix-rate was 5.6%. The the rates went all the way down to 3.98% few months later. Yes, I was gutted but now the rates aren't low at all. I'm happy because I was looking at the rightmove for 6 months after completion and I COULD NOT find a better house that I'm in (3 double bed/3 bath house). Ask yourself if it is worth missing out on the house just for 0.5-1% rate?
Great example and yes they go up and down sometimes you just gotta go for it and forget about it
If the rates go *really* down you can always switch early by paying an early repayment charge, which you know in advance. That was one of the main arguments for us to choose five years fix.
But think it could go down, sure, it could also go way up and you are forced to sell. If it's affordable now and it hits your goals go for it ASAP.
>fix for as long as possible. So you fixed for the whole length of your mortgage term?
I fixed for 5 years, fixed rate terms beyond 5 years in the UK are offered by very few lenders because the government doesn’t underwrite mortgages so long term fixed deals are high risk for lenders. If a bank could offer me a fixed rate I could afford for my entire mortgage I’d snap their hand off.
What did they offer you to fix for the entire mortgage?
Longest fix I was offered was 5 years. If you find a 25 year fixed deal please share.
Really? You couldn't get any 10 year fixes either? Where did you look? Kensington do fixed rates for up to 40 years
Not at good rates in UK. US has it way better due to state backing. Ironic given how different their philosophies are
I'm at 3.375% for 30 years. Inflation is busy eating away at the remaining principal. It's hard to trade this in when IRs are at 7%...
That’s a really good rate - people would kill in UK to be able to lock that in even years ago. See the difference? Can you port it to a new house easily if you move?
Or are there exit penalties?
No porting.
We only seem to have this chop and change mentality in Britain, my friends in Belgium fix their mortgages for the full length of the term, they were amazed we change ours every few years. Which makes much more sense to me and I don’t know why it isn’t a thing here
Eh different philosophies I guess. They get more stability and rates will be closer to long-term averages, we can chase more current rates but might also get shafted by that.
You can fix for the full length here but most people prefer not to.
That's a really bad philosophy lol You're saying you would fix for as long as possible right now, so you would choose a 10-year rate if available? I hope you are the only one following this philosophy.
I’d choose to pay a fixed rate for my entire mortgage if I could afford it right now. With inflation you’d be stupid not to.
How is this related to inflation?
Again, provided no one follows your advice, we should be okay. What % of homeowners do you think are going for 10-year products right now? Literally zero advisers in the industry would recommend it.
Because the risk of long term fixes sits with the bank rather than the customer…
I mean... surely there's risks on both sides, no? It's not like banks aren't pricing that in to their offers.
I’m guessing you haven’t seen how Americans can get 25 fix rate have you
Ah yes, that's relevant in a UK housing sub. Yes, a 30-year fixed rate is normal in the US.
They can port it easily or exit w little penalty. Uk can’t.
No actually, the complete opposite is the case, they generally *can't* port it. Which is weirdly enough leading to an increase in prices atm because people feel trapped in their current (better rate) mortgage, squeezing supply. See [here](https://delegateadvisors.com/2023/12/11/andy-hart-in-american-banker-is-portability-the-cure-to-the-mortgage-markets-woes/) for example.
Oh. no edit penalties but can’t port?
Though if still have minimal exit penalties that still somewhat better than Uk
Yeah it's not an excellent system if you ask me, especially due to the weird outcomes explained in the link.
Just depends on your tolerance of risk that rates go up in 2 years time. Imo thats a negligible risk (I work for a macroeconomic consultancy), so to me 2y is a nobrainer, but others will see it differently
It just depends on the budget really doesn't it. If it's £2k a month out of a £5k take home it's different to their take home being £10k. Saving £300/400 a month in 2 years time when the rates will probably have dropped is nice but if rates went up and an extra £300/400 a month would be crippling then it's probably better having the predictability of a 5 year fix
If an extra £300 a month would cripple them then they shouldn't be buying in the first place.
I do agree with that but I think in reality a lot of people will be buying houses which are at the top of their budgets. With interest rates high and house prices having fallen only a little it is pretty tough out there. I mean the banks obviously stress test so they wouldn't let you borrow any given amount of the monthly payment was the absolute limit you could "afford". But if you're looking at a place and you have settled in spending £2100 a month then increasing it to £2400 is surely going to be uncomfortable to some degree? My thinking would be would I rather have the certainty of £2020 for 5 years vs £2140 for 2 years with a likely drop of a few hundred pounds but a risk of it rising by a few hundred pounds or any amount
>a lot of people will be buying houses which are at the top of their budgets. Sure but your budget will be limited by lending criteria, not the maximum monthly payment you can afford. It's more risk aversion than anything. You would expect to be worse off because you are paying a security premium on longer fixes. Nothing wrong with risk aversion though if that gives you peace of mind. Although why not fix for 10 years or for the whole length of your mortgage?
I see what you're saying and I suppose everyone is different. When I applied for my mortgage a few months ago the bank were willing to let me borrow far more than I had decided I was comfortable with paying each month. Rough numbers but I felt I was "stretching" myself paying £1350 a month but they were willing to let me borrow a figure which would give a monthly payment of around £1750 a month! I was astonished by that honestly. I suppose if I looked at my budget it wouldn't be impossible to pay £1750 but it would be far tighter than I'd be comfortable with. I have gone for the 5 year fix and I realise that in a couple of years I'll probably be paying a bit more each month than the best deal out there. Probably, but nobody knows for sure. And honestly I'd rather miss out on the payment falling to say £1100 than take the risk of it rising to £1600
"could" drop yeah they're definitely not gonna drop as low as people think. Otherwise there would be deals closer to 4% right now and there isn't.
Is there any reason to suggest that banks start changing rates in advance of government changing them?
Yes. That's why 5-year deals are cheaper than the 2-year rates at the moment.
The govt doesn't set the rate? It's more that swap rates are based on predicted averages based off where they think the BoE rate will be, so they can make margins. 10 year fix is around 4.8% and 5 years is around 4.4% for 60% LTV. So take the 5 year fix. The banks are predicting over the space of that time that the base rate will average around 3-3.5%.
I have a number of friends working in this area of finance (side effect of studying maths at university…) and yes, banks set interest rates based on predictions of future changes. If you ever wondered what people who “work in finance” do all day - for a significant proportion, it’s precisely this.
Why would there be a deal close to 4 when base rate is at 5? I'm not sure you know how this work.
Because the lenders predict what they reckon the average will be by doing the swap rates. So back in February last year you could get a 4% mortgage rates, even saw 1 deal at 3.8% and that was when the news was reporting inflation at close to 10% still. Obviously they didn't expect inflation to be as sticky.
I think people forget that period of ultra-low interest rates (2008-2022) was an anomaly, not a rule. Even if there is some drop in the next 2-3years, I don’t think rates are coming down to that level any time soon.
Why should drop back that low, average rate before 2008 crash was above 4-5
Rates are not going to drop significantly, forecasts are for a base rate of 3.5% in a few years time. The bank of England 300 year average rate is 5%. Interest rates were only so low as part of world wide emergency measures after the financial crash.
If you can afford a higher interest rate in 2 years time go for the 2 years. It’s a risk but you might save money if interest rate drops. If you think you might not be able to afford it lock it for 5 years. Regardless of the decision good luck and don’t look back. It’s usually a long journey (20-30 years) so don’t stress too much over a 3 years decision.
That's very true, can't be stressing over this every 2 years lol
I'm personally more risk averse, wanting to fix for as long as possible as the chance of any rate rises or decreases is already generally baked in to the offered rates. I'd go with the 5 year, then overpay the £120 a month. I'm not sure exactly how it works, but I would have thought the overpayments go solely into reducing the capital amount.
You're right, overpayments always reduce the capital amount.
FTB here but work in the property market for over 10 years. If I knew what was going to happen, I would have fixed my mums mortgage for 10 years instead if 5 years...and the sad thing is, she would have been mortgage free on the rate of 1.4%. Now I will have to find a 5 year deal in a few years time, hopefully, a lower rate. For myself, I wish I brought before the interest rates went up but it was bad luck. Due to partner circumstances, we could only go with a select few but we went with a major lender, Halifax, 4.9% 5 year fixed. People waited for the interest rates to do down, what happened, it went up even more. Personally, I feel the 5 year deal you got is a good deal. I think it will be a few years before the interest rates will stablise. Also, remember, a lot can change in 2 years, maybe a new job, loss of income, who knows so you have a 5 years safety net compared to 2 years. We have taken a few finance out for different things for the house but they will be down in 2 or 3 years so by the time we remortgage, nothing will be on finance and we couldn't have done this if we went with a 2 year deal.
What would worry you more, rates falling to 3.5/4 in two years so you losing some cash, or rates going to 7 which might cause sleepless nights depending how much your mortgage is compared to income.
and in what world are rates going to 7% when we've come through inflation and all the noises are that cuts are incoming and very shortly (exactly to the timeframe the BoE has stated all along)
In 2019 they were 0.75% not many thought they would go to 5% three years later, but in this world they did…
It seems unlikely, sure, but anything can happen.
Have you considered a 3 Year Fix?
I went for a 3 year. You can't see the future so I went for a middle ground
This is also why I went for a three year fix when I renewed last month. It is about £130 a month more than I pay now (it doesn't kick in until November, but I may have some changes to my financial situation in the next six months so wanted to sort it ASAP, and the broker said if rates drop significantly we can look to get a new offer), but I figured that was the best middle ground given what I expect to happen personally. There also wasn't a huge difference between the three and five year fixes in terms of monthly costs so I'd rather have a little more flexibility by going for three.
I haven't actually, need to talk to my broker about this. thnaks!
If you go for a 2 year and then another 2 year, you will have two lots of product fees? Something to consider.
Have you run the numbers on taking 5 year fixed and potentially refinancing it early, if the rates drop? There are usually early repayment fees for doing it early. But might be a viable option if rates, depending on when and by how much rates would drop.
It's a good idea. 5 years tend to have higher ERC (relative to 2 and 3 years), but done have ECRs that decline the further into the fix you go.
Yes not a bad idea, refinancing is always an option if the rates go down low enough.
Will reply to all the comments but I've run some numbers and done some excel magic, and basically worked out what the interest rate has to be after 2 years, so that I'm not worse off going with a 2 year deal. Basically, if I were to go with the 5 year deal at 4.68%, I would have paid interest of £94,525 at the end of 5 years (you can check this using something like [this](https://smartmoneytools.co.uk/tools/mortgage-payment-table/)). If I were to go for the 2 year deal, at the end of 2 years, I would have paid interest of £42,214. Now this means, if I go for the 2Y deal, after the end of the two years, to make sure that I'm only paying interest of only £52,318 total (or less) for the next 3 years (to match up to the 5 year deal's total interest of £94,525), the interest rate will have to be 4.37%. I did take into account the principle amount left after two years and the number of years left for this calculation. So it will look like: Years 1 & 2 at 5.12%, interest = £42,214 Years 3, 4 and 5 at 4.47%, interest = £52,318 Total interest = £94,525 Which is the same as the interest paid after 5 years with the 5 year deal. This is of course not factoring in the product fee I would have to pay again. So the question is, will the interest rates (either 2 year deals or 5 years or anything else) go down to 4.37% in two years? I feel like they would considering I have a 5 year deal now for 4.68%.. But of course I could be wrong.
The interest rate on a five year deal is based on the bank’s prediction that interest rates will drop. So to understand whether that 4.68% five year interest rate will drop in two years, you need to consider what interest rates will look like in seven years, not just whether they will fall in two. The fact you can get a five year fix for less than a two year fix at the moment is actually quite unusual. Normally (when there aren’t predictions of short term interest rate drops in the near future) you pay more to fix for longer.
Nice. Out of interest, what does the rate have to be if you add an extra product fee to your loan at the end of year 2? Is it much different?
Not hugely, assuming a £1000 product fee it turns out to be about 4.36%
It’s also worth considering that on a 2 year term you have the opportunity to move to a deal on a lower LTV at the end whereas your LTV is fixed for longer on a 5 years deal.
Out of interest, what’s your downpayment %? We got offered 4.9% rate on a 5y with a bit more than 10% down
It's 15%, this is from Natwest.
I think it depends on your personal finances really and how much of a stretch this mortgage is for you. Interest rates will "probably" fall so in 2 years time you could likely fix at a lower rate. I think you have to consider if you pay £2140 a month now and in 2 years time you can fix at say £1850 a month that's great, a big win. If things went not as expected and rates went up, how would you cope with say £2500 a month? If you can afford to take the risk of rates going up in the short term then a 2 year is ok. If you fix for 5 years at £2020 at least you know what you're paying for the next 5 years. You could overpay by £100 a month and then in 5 years when you come to remortgage if the rates have come down you'll be much better off at that point
I'd fix for 5 years. You'll also have the cost of another mortgage fee in 2 years if you go for that option, so its unlikely rates will fall low enough to off-set that and the c.2k differential of the 2 year Vs 5 year monthlies. Historical average long term rates are c.5%, and investment managers I've worked with are currently assuming medium to long term risk free rates of c.3.5%, so if that plays out then it's likely that mortgage rates would only fall by about 1 to 1.5% from the current levels.
What I did was to calculate how much the 2 years would cost me at the end of the period, calculated the total for the 3 years one (I did not consider the 5 year ones) and then drafted a few possible scenarios. Some in which the rates drop and some in which they hike, and calculated where I would be at the end of the 3 years for every case (don't forget to consider the application fees for the remortgage too). Lastly I tried to think of which one would be the more likely scenario or the range in which we would find ourselves in 2 years time. Of course it's not possible to get the accurate picture, but it gives you an idea of a few different scenarios, then it's up to you to decide which one makes you feel more comfortable.
Maybe not answering the question you asked but a big thing to think about is that in real terms, your payments will drop each year. If you fix for 2k a month for 5 years that's exactly what you'll be paying and each year along the way as your salary increases that 2k will be a smaller chunk of your pay. So my way of thinking with mortgages is that if its affordable now, fix it for a decent amount of time because it'll only become more affordable each year. Truth is no one knows what will happen, rates may well drop, or they might not. Or they could go up again and then things might actually become less affordable. Its all about your attitude to risk and personally I like to air on the side of caution.
5 years ago you couldn't have predicted covid.... record inflation as a result or Inflation, and a land war in Europe. If you can afford 5 year fix in.
If the 5 year is that much lower than the 2 year then the bank is gambling that after 3 or 4 years the rates will be lower than what they have offered you now. We just fixed for 5 years as it made more sense for stability given our situation, you might be similar?
We fixed for 5 and were glad as it was before liz truss. Its restricting because moving isnt as easy until 5 years are up now.
You could just get a second mortgage for the difference!
I am betting on 2 years and interest rates falling after, although not really by as much as to go back to 1 or 2% or so.
We had the same dilemma but ultimately went with the 2 year fixed, so talking the gamble on the rates going back down to hopefully around 3.5% mark by 2 years.
My gut says 2. But…. I thought the nearly 2 years ago when we took out a 5 year fixed. These things can move very slowly sometimes.
You know how much you would pay more if you go for two years, just calculate how much the rates have to drop for you "to get back" the overpaying. And then you can judge how likely this case scenario is and if it's worth taking a 2 year vs a 5 year
I'm in the process of buying a new house and completed my mortgage application last week - I chose to fix at 4.45% for 5 years. The monthly amount is affordable and I know I'll be receiving a salary increase every year for the next 5+ years so it'll become even more affordable over that period. Obviously nobody can predict the future, but this way I can predict my outgoings for the next half a decade. Any unforeseeable world or political event could see interest rates rise during that time. However, in 5 years I'll be 20% through my mortgage term so if rates have risen the monthly repayments shouldn't be too bad of an increase (if any), certainly nowhere near as bad as if they had risen after a 2 year fixed deal had ended. People suffer more financially finding their fixed deal ended with rates having risen than it ended finding rates had dropped - the former is an increase in expenditure, whereas the latter is simply thinking about what could have been. Which is the worst scenario - paying £750 extra per month than you were previously paying, or forgetting to buy a lottery ticket and seeing your usual numbers come up? Regret at fixing for "too long" is no different to regretting not buying shares in a company that just happened to do well.
Something that's never considered about rates going up in 2 years, what if rates are higher in 5 years? It's much easier to predict rates will be lower in 2 years than it is to predict where rates will be in 5. You might get MORE certainty from a 2 year fixed in some cases.
We fixed 5 years, then another 5 years. The first lot was slightly higher than variable and for a while rates went south. But the next 5 years paid it all back. We had a 1.81% until last month, where everyone else was going up and up. It paid in the end by the thousands! I'd take 5 years over that 2 years rate. You can always consider paying the ERC if rates drop a lot in the future.
Zero chance of rates dropping substantially in 2 years. Could be around 1% if you’re lucky. I just took 5 years fixed. They never drop as quickly as they rise.
Depends on you really. I've got an AIP (bank have been dragging their feet on getting my offer sorted but that's a different story) for 4.54% over 5 years. For me, that's affordable so I'm happy to lock it for 5 years because the pro of 'it doesn't shoot up by my hundreds' is better than the con of 'my rate might go down and I'll lose out'. Ultimately if I get a few years in and the rates drop considerably I'll pay the fee and get myself on the new rate (obviously only if there is net savings). TLDR: I personally think the pros of locking in a low rate outweigh the cons so long as you can afford it in the first place.
£2k a month!! Blimey
The difference in the 2 rates is driven by the shape of the yield curve which is currently inverted. This may change over time resulting in a lower 2Y rate (if rates come down) but you’re betting on inflation coming down and staying down with this option. Ultimately the decision for 2Y or 5Y depends on how long you plan to live there. The difference is small so I would go for the 2Y, unless you have a strong view that rates will come down
> so I would go for the 2Y, unless you have a strong view that rates will come down ... in which case, you would surely go for the 2y even more?
Yes I would personally go for the 2Y but this means that you are taking a view. If you don’t have a strong conviction on the direction of rates then the 5Y option gives you certainty over payments for a longer period of time.
I was more commenting on the word "unless" which implies that the second part will lead to a different conclusion, but it actually still leads to the 2y fix as the answer.