Mortgage fix - 2yrs vs 5yrs at current rates
Discussion
My current mortgage fix is due to expire at the end of December. Natwest allow me to lock in a new fix up to 6 months in advance - so from about 2 weeks ago. A couple of months ago everything was looking rosy and mortgage rates seemed to be hovering about 4%, higher than my previous fixed rate (2.5%) but not by that much. At 4%, my intention was to take another 5 year fix, couldn't imagine rates dropping much lower than that over the next 4-5 years.
But in the last couple of months, mortgage rates have increased dramatically, and all I could do was sit and watch until the 1st July came round. So now my lender is offering me 6.24% on a 2 yr fix or 5.7% for a 5yr fix. Both me and broker have looked around, and those rates are pretty competitive - a couple of the smaller lenders about .25% cheaper is the very best, but not really worth the hassle of trying to switch lender for it.
I'm having second thoughts about fixing for 5 years now its at 5.7% rather than ~4%. I've ran some numbers and from what I can see, if I took the 2yr fix, rates would have to have dropped to sub 5% in years time for me to be any better off. I'm not sure how likely a prospect that is at this point though?
Other considerations - I'm with Natwest and they now allow 20% annual overpayment. If I take the 2yr fix they'll recalculate my monthly payment after the two years are up, which would reduce how much I'm effectively paying/able to overpay because the base payment will be less. Also, they've tweaked their ERC rates so now they no longer decrease linearly over the 5 year fix - the 1st year it's 4.5%, but in yr 3 it's still 4%. And of course yr3 is about the stage where borrowers are most likely to be interested in breaking out of their fix.
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
But in the last couple of months, mortgage rates have increased dramatically, and all I could do was sit and watch until the 1st July came round. So now my lender is offering me 6.24% on a 2 yr fix or 5.7% for a 5yr fix. Both me and broker have looked around, and those rates are pretty competitive - a couple of the smaller lenders about .25% cheaper is the very best, but not really worth the hassle of trying to switch lender for it.
I'm having second thoughts about fixing for 5 years now its at 5.7% rather than ~4%. I've ran some numbers and from what I can see, if I took the 2yr fix, rates would have to have dropped to sub 5% in years time for me to be any better off. I'm not sure how likely a prospect that is at this point though?
Other considerations - I'm with Natwest and they now allow 20% annual overpayment. If I take the 2yr fix they'll recalculate my monthly payment after the two years are up, which would reduce how much I'm effectively paying/able to overpay because the base payment will be less. Also, they've tweaked their ERC rates so now they no longer decrease linearly over the 5 year fix - the 1st year it's 4.5%, but in yr 3 it's still 4%. And of course yr3 is about the stage where borrowers are most likely to be interested in breaking out of their fix.
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
I have nothing to add but I too had been watching for the 1st of July for my earliest time to remortage without a penalty (penalty would have been a god idea 3 months ago...) It does feel like a kick in the teeth that basicly random luck of your timing is going to dictate how much free cash you will have for the foreseeable...
asfault said:
I have nothing to add but I too had been watching for the 1st of July for my earliest time to remortage without a penalty (penalty would have been a god idea 3 months ago...) It does feel like a kick in the teeth that basicly random luck of your timing is going to dictate how much free cash you will have for the foreseeable...
Yes, if I'd taken a 5 year fix at the start (7 years ago), when that would have expired I could have got another 5yr fix at 0.85%. That would taken me until the end of 2026, and bought me a lot more time to pay down the debt rather with money that will now just be servicing the interest. I nearly bought my way out of my current fix 2 years ago to get that 0.85% offer, ran the numbers at the time and I'd have been marginally better off paying the ERC to switch then, but broker advised me out of it. And again about 15 months ago when I suggested the same as rates had increased a bit (was looking at a 2.3% fix for 10 years, how I wish I'd taken that now).I'm also feeling a bit rinsed with the gas and electric prices - I signed up to a good 2 yr fixed rate deal summer 2021. Then my supplier went bust and I my account was locked for months at the price cap while EDF mucked about migrating it to them. By the time that was sorted, it was starting to kick off in Ukraine and energy prices were getting silly.
I consider myself lucky that my mortgage is small, and I've not been on a really low rate. Some people are going to be going from 1% interest to 6% on much bigger balances. That'll be an eyewatering difference.
Pretty much in the same boat as you. Mortgage deal is up end of Jan so we can lock in a new deal 1st Aug with current provider. Although we don't know what the figures will be in a couple of weeks, the current deals match what you've been quoted...so we're able to get a rough idea of the extra we'll have to pay.
The hard part is deciding between a 2 or 5 year fixed!
The hard part is deciding between a 2 or 5 year fixed!
Edited by BUG4LIFE on Wednesday 19th July 13:52
I was in a similar position a few months ago with similar levels of debt. I ended up making a spreadsheet and modelling the annual interest cost based on the two rates, fees and mortgage over-payments.
The complication is that if your debt is low it will be a good percentage lower in 5 years time, so the interest paid is falling fast. Alongside that on a 2 year fix, if you have fees to pay again in 2 years time, your debt will tick up again, with the fees being a relatively high percentage of the total debt. It's more money to be paid back and it's more interest on that money over the next 3 years.
You're betting that interest rates will fall enough in 2 years to more than cover the extra fees + interest. When I worked out the break-even point for me I needed the rate back down around 2%, which isn't going to happen, but the key variable is how quickly you're anticipating reducing the debt, ie where your numbers are in 2 years time.
I couldn't mash my assumptions enough to make more than a few hundred pounds difference, so I went for the simplicity of 5 years.
The complication is that if your debt is low it will be a good percentage lower in 5 years time, so the interest paid is falling fast. Alongside that on a 2 year fix, if you have fees to pay again in 2 years time, your debt will tick up again, with the fees being a relatively high percentage of the total debt. It's more money to be paid back and it's more interest on that money over the next 3 years.
You're betting that interest rates will fall enough in 2 years to more than cover the extra fees + interest. When I worked out the break-even point for me I needed the rate back down around 2%, which isn't going to happen, but the key variable is how quickly you're anticipating reducing the debt, ie where your numbers are in 2 years time.
I couldn't mash my assumptions enough to make more than a few hundred pounds difference, so I went for the simplicity of 5 years.
mjb1 said:
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
Is it worth fixing at that level, by the time you've paid the remortgage fees and get tied in for another 5 years?Are your savings paying a higher rate than the new mortgage interest rates?
mcflurry said:
mjb1 said:
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
Is it worth fixing at that level, by the time you've paid the remortgage fees and get tied in for another 5 years?Are your savings paying a higher rate than the new mortgage interest rates?
My savings are paying more than my current mortgage rate (4.5% vs 2.5%), which is why I haven't been overpaying the mortgage recently, better to bank it instead for now. But savings rates aren't going to beat the new rates on offer. And that's before they've been taxed.
To add insult to injury, my broker dragged his heels a bit and the lender has increased rates by another .35% since I instructed him what I deal I wanted to take. That's going to be another £1500 of interest over 5 years. I could have booked it in myself through the lenders website, just a simple box ticking exercise. I only went through the broker as a favour/loyalty to him because he gets a small kickback and it doesn't cost me any extra. So now my option is 6.04% for 5 years, or 6.59% for 2 years. I've reserved the 5yr fix, but I'm hoping mortgage rates will drop back a bit by December, so I can get something a bit cheaper.
Just over a year ago, rates were creeping up, and I was considering paying the ERC to refix early. The deal on offer was 10 years at 2.31%. Broker talked me out of it, his exact words were "I don't see interest rates going much higher from here".
I’m sure rates will be lower in a couple of months time. All the signals suggest so and accord are reducing their rates by up to 0.4 tomorrow.
Most good brokers should keep switched rates in a workflow / task based system to review every couple of weeks so they aren’t reacting when they are announced and can work throigh the ones that need to be switched to a lower rate in a methodical fashion.
I do feel personally that it will be a steep downhill slope from now on if inflation keeps falling (august report for July looks like a given). Let’s hope it’s a merry Christmas for many.
Most good brokers should keep switched rates in a workflow / task based system to review every couple of weeks so they aren’t reacting when they are announced and can work throigh the ones that need to be switched to a lower rate in a methodical fashion.
I do feel personally that it will be a steep downhill slope from now on if inflation keeps falling (august report for July looks like a given). Let’s hope it’s a merry Christmas for many.
mjb1 said:
mcflurry said:
mjb1 said:
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
Is it worth fixing at that level, by the time you've paid the remortgage fees and get tied in for another 5 years?Are your savings paying a higher rate than the new mortgage interest rates?
My savings are paying more than my current mortgage rate (4.5% vs 2.5%), which is why I haven't been overpaying the mortgage recently, better to bank it instead for now. But savings rates aren't going to beat the new rates on offer. And that's before they've been taxed.
To add insult to injury, my broker dragged his heels a bit and the lender has increased rates by another .35% since I instructed him what I deal I wanted to take. That's going to be another £1500 of interest over 5 years. I could have booked it in myself through the lenders website, just a simple box ticking exercise. I only went through the broker as a favour/loyalty to him because he gets a small kickback and it doesn't cost me any extra. So now my option is 6.04% for 5 years, or 6.59% for 2 years. I've reserved the 5yr fix, but I'm hoping mortgage rates will drop back a bit by December, so I can get something a bit cheaper.
Just over a year ago, rates were creeping up, and I was considering paying the ERC to refix early. The deal on offer was 10 years at 2.31%. Broker talked me out of it, his exact words were "I don't see interest rates going much higher from here".
mjb1 said:
My current mortgage fix is due to expire at the end of December. Natwest allow me to lock in a new fix up to 6 months in advance - so from about 2 weeks ago. A couple of months ago everything was looking rosy and mortgage rates seemed to be hovering about 4%, higher than my previous fixed rate (2.5%) but not by that much. At 4%, my intention was to take another 5 year fix, couldn't imagine rates dropping much lower than that over the next 4-5 years.
But in the last couple of months, mortgage rates have increased dramatically, and all I could do was sit and watch until the 1st July came round. So now my lender is offering me 6.24% on a 2 yr fix or 5.7% for a 5yr fix. Both me and broker have looked around, and those rates are pretty competitive - a couple of the smaller lenders about .25% cheaper is the very best, but not really worth the hassle of trying to switch lender for it.
I'm having second thoughts about fixing for 5 years now its at 5.7% rather than ~4%. I've ran some numbers and from what I can see, if I took the 2yr fix, rates would have to have dropped to sub 5% in years time for me to be any better off. I'm not sure how likely a prospect that is at this point though?
Other considerations - I'm with Natwest and they now allow 20% annual overpayment. If I take the 2yr fix they'll recalculate my monthly payment after the two years are up, which would reduce how much I'm effectively paying/able to overpay because the base payment will be less. Also, they've tweaked their ERC rates so now they no longer decrease linearly over the 5 year fix - the 1st year it's 4.5%, but in yr 3 it's still 4%. And of course yr3 is about the stage where borrowers are most likely to be interested in breaking out of their fix.
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
If you have 30k savings maybe run the numbers of an offset mortgage , some guys were chatting about the Barclays one in the other thread.But in the last couple of months, mortgage rates have increased dramatically, and all I could do was sit and watch until the 1st July came round. So now my lender is offering me 6.24% on a 2 yr fix or 5.7% for a 5yr fix. Both me and broker have looked around, and those rates are pretty competitive - a couple of the smaller lenders about .25% cheaper is the very best, but not really worth the hassle of trying to switch lender for it.
I'm having second thoughts about fixing for 5 years now its at 5.7% rather than ~4%. I've ran some numbers and from what I can see, if I took the 2yr fix, rates would have to have dropped to sub 5% in years time for me to be any better off. I'm not sure how likely a prospect that is at this point though?
Other considerations - I'm with Natwest and they now allow 20% annual overpayment. If I take the 2yr fix they'll recalculate my monthly payment after the two years are up, which would reduce how much I'm effectively paying/able to overpay because the base payment will be less. Also, they've tweaked their ERC rates so now they no longer decrease linearly over the 5 year fix - the 1st year it's 4.5%, but in yr 3 it's still 4%. And of course yr3 is about the stage where borrowers are most likely to be interested in breaking out of their fix.
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable, but I've been valiantly overpaying to try and shorten the mortgage term but these rate increases feel like I've been put back at square one (I know I'd be in a much worse position had I not been overpaying). I've got about 30k in savings available to make a lump sum overpayment, so mortgage balance will be down to about 50k by the time the new rate hits.
jayxx83 said:
I’m sure rates will be lower in a couple of months time.
...
I do feel personally that it will be a steep downhill slope from now on if inflation keeps falling (august report for July looks like a given). Let’s hope it’s a merry Christmas for many.
The base rate, or mortgage rates? ...
I do feel personally that it will be a steep downhill slope from now on if inflation keeps falling (august report for July looks like a given). Let’s hope it’s a merry Christmas for many.
I believe that there's still a probable 25 point hike in August? And then the BoE could hold there for a time?
Perhaps someone who remembers last time can speculate as to how quickly we can expect mortgage rates to fall when the base rate plateaus and falls.
I assume that when there's a consensus that the base rate has topped out, lenders will eventually start competing on margins. When the base rate falls, will mortgage rates come down in lockstep, or will it be up like a rocket and down like a feather?
If the summit is in sight, a longer tracker starts to look more appealing compared to a fix at current rates.
Unfortunately I remember mortgage rates back to the mid 80's. (and probably before) My guess is rates may drop 0.5% or so in 2 or 3 years but expect them to hoover at about 6% until the next banking crisis. Remember that the emergency rates below 1% were an emergency measure to stop the banks collapsing, they were then kept to help through COVID, so will probably not go back to near 0%. Even if the size of your mortgage is far bigger than in previous decades. The rates should never have been kept that low as it has really messed up the housing market.
gangzoom said:
mjb1 said:
My mortgage is relatively small (about 85k), and LTV is about 25% so nothing is going to be completely unaffordable.
Those are tiny sums for a mortgage on here, just do what you feel is right, not worth over analysis things.Roger Irrelevant said:
I'd hate to be agonising over fixes and trying to read the runes of the financial markets.
Alas this is where I’m at as a FTB with 70% LTV and no appealing variable options. 2 year and hope that rates are on a glide path, and someone will give me a half decent tracker or 5 year fix at a more palatable rate at remortgage time?
3 year? Nether here nor there.
5 year? Cheaper whichever way you look at it right now, but will it feel a bit itchy during year 4 & 5? The base rate may be near its peak but the message seems to be they will be higher for longer than previously expected. Also we can’t expect them to drop back down so far on the other side.
Targeting 60% LTV ASAP but it’s going to take two terms however I cut it. Currently thinking a 2 followed by a 5.
ARHarh said:
Unfortunately I remember mortgage rates back to the mid 80's. (and probably before) My guess is rates may drop 0.5% or so in 2 or 3 years but expect them to hoover at about 6% until the next banking crisis. Remember that the emergency rates below 1% were an emergency measure to stop the banks collapsing, they were then kept to help through COVID, so will probably not go back to near 0%. Even if the size of your mortgage is far bigger than in previous decades. The rates should never have been kept that low as it has really messed up the housing market.
Pre covid rates were slowing rising but covid stopped it dead in its tracksHustleRussell said:
Shame there aren't more players offering 3-year fixes. BoE have set the mood music for 'higher for longer'. I've got a two year in the can but will the rates have levelled off by late 2025?
Lenders have never really been onboard with 3 year rates. Probably because demand for them has always been very low.They never offered the attraction of the (previously) lower 2 year fixed nor the long term security of a 5 year fix. Just in the middle of the two hence the lack of demand and therefore the lack of choice.
There are still lenders out there offereing them, just not the whole market.......
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