Mortgage - 2 year or 5 year fixed?
Discussion
I'm currently in the process of buying a property. My mortgage broker is pushing us towards a 2 year fixed rate at 4.22%.
I had queried about a tracker mortgage with the broker. However, it seems that the tracker product is base rate + 0.60% premium. A large cut in interest rates need to happen in order to break even against a fixed option. Over a 2 year period, I would expect the tracker would end up being more expensive.
The other option is 3 year, or 5 year fix. 5 year is currently 3.83% which sounds pretty good.
My broker has not suggested 5 year products. I suspect that's because he gets commission every time I take out a product with him. If I take out a 2 year and then renew with him, that's 2x the commission for him? I could ask his view on the 5 year, but he's not Mystic Meg and it suits his pocket to sell me 2 products, rather than 1.
Personally, I think it's feasible that in the next few years the interest rate could fall to 3.5% - although the BOE has historically been slower than expectations to move on rates. I think unless anything dramatic happens economically that we won't be going back to sub 1% interest rates so there's little risk on missing out on those bargain rates.
However, the other factor is in 2 years / 5 years, what the future expectations for the path of interest rates is for the future.
I have another month or so before having to commit to a product. Although I don't expect another rate cut to take place in September.
Any thoughts on how long to fix for?
I had queried about a tracker mortgage with the broker. However, it seems that the tracker product is base rate + 0.60% premium. A large cut in interest rates need to happen in order to break even against a fixed option. Over a 2 year period, I would expect the tracker would end up being more expensive.
The other option is 3 year, or 5 year fix. 5 year is currently 3.83% which sounds pretty good.
My broker has not suggested 5 year products. I suspect that's because he gets commission every time I take out a product with him. If I take out a 2 year and then renew with him, that's 2x the commission for him? I could ask his view on the 5 year, but he's not Mystic Meg and it suits his pocket to sell me 2 products, rather than 1.
Personally, I think it's feasible that in the next few years the interest rate could fall to 3.5% - although the BOE has historically been slower than expectations to move on rates. I think unless anything dramatic happens economically that we won't be going back to sub 1% interest rates so there's little risk on missing out on those bargain rates.
However, the other factor is in 2 years / 5 years, what the future expectations for the path of interest rates is for the future.
I have another month or so before having to commit to a product. Although I don't expect another rate cut to take place in September.
Any thoughts on how long to fix for?
I’d like to think your broker should be acting for you and if he is actively only advising 2 or 3 year deals rather than 5 that’s perhaps because that’s his advice.
I would ask him for his view on 5 years though or if you are really fussed that he’s only thinking of his commission change your broker.
Personally I think your drop suggested to 3.5% is a 2026+ event all things being equal.
I’d therefore personally be a 2 year call today with maybe a 3 year if the rate is especially good.
Also depends on how much piece of mind you want going fixed in the first place too.
I would ask him for his view on 5 years though or if you are really fussed that he’s only thinking of his commission change your broker.
Personally I think your drop suggested to 3.5% is a 2026+ event all things being equal.
I’d therefore personally be a 2 year call today with maybe a 3 year if the rate is especially good.
Also depends on how much piece of mind you want going fixed in the first place too.
The two year deal is 0.39% higher than the 5 year deal. How much would rates need to fall in the next two years so that when you remortgage you would be better off over the remaining 3 years?
I would imagine that rates would need to fall at least 1% in the next two years for you to be better off overall. It is entirely possible, but who knows what is going to happen?
I think a lot of people have only known a base rate of 0.25% so think it is going to go back to this level over the next few years. It might do, but then equally it might not.
But the banks offering a lower rate over 5 years compared to 2 makes me think they are pretty certain rates will fall.
But by how much is anyone's guess and a gamble.
Unless rates significantly fall over the next two years I bet the 5 year and 2 year deals will work out fairly similar over the next five years.
I would imagine that rates would need to fall at least 1% in the next two years for you to be better off overall. It is entirely possible, but who knows what is going to happen?
I think a lot of people have only known a base rate of 0.25% so think it is going to go back to this level over the next few years. It might do, but then equally it might not.
But the banks offering a lower rate over 5 years compared to 2 makes me think they are pretty certain rates will fall.
But by how much is anyone's guess and a gamble.
Unless rates significantly fall over the next two years I bet the 5 year and 2 year deals will work out fairly similar over the next five years.
g4ry13 said:
My broker has not suggested 5 year products. I suspect that's because he gets commission every time I take out a product with him. If I take out a 2 year and then renew with him, that's 2x the commission for him? I could ask his view on the 5 year, but he's not Mystic Meg and it suits his pocket to sell me 2 products, rather than 1.
Doesn't sound like you like your broker much!Maybe ask him why he's advising a two year rate rather than a 5 year rate..........there might be an understandable reason for that rather than just future commission, which may not even happen.....
I don't think your broker will be giving you advice on what the money markets are going to be doing in 2, 3, 4 or 5 years. If he does then find another one. The mortgage rate you pay will depend on what rate the bank can get in the money markets today and how much they want to hedge against future interest rate movements (they don't always hedge 100% as it depends on the 'shape' of their book).
The broker should be looking at your circumstances and using that to decide what would be best for you. I'd then expect them to provide you with some options.
For what it's worth I don't think we will return to ultra low rates for a long time. That's what I'm planning on anyway.
The broker should be looking at your circumstances and using that to decide what would be best for you. I'd then expect them to provide you with some options.
For what it's worth I don't think we will return to ultra low rates for a long time. That's what I'm planning on anyway.
I'm in the process of fixing for 5 years because I simply looked at what the rate would need to be in 2 years time in order to break even and felt that it was in the "possible but might not happen" camp, and that was just to break even. Then factor in any potential fees in 2 years' time and the time to get it arranged plus the security of a longer fix and it became a no brainer for me.
However, even at the rates now available it sticks in the throat when I'm currently 2 years into a 10 year fix at 2.5% (don't ask!)
However, even at the rates now available it sticks in the throat when I'm currently 2 years into a 10 year fix at 2.5% (don't ask!)
wiggy001 said:
I'm in the process of fixing for 5 years because I simply looked at what the rate would need to be in 2 years time in order to break even and felt that it was in the "possible but might not happen" camp, and that was just to break even. Then factor in any potential fees in 2 years' time and the time to get it arranged plus the security of a longer fix and it became a no brainer for me.
However, even at the rates now available it sticks in the throat when I'm currently 2 years into a 10 year fix at 2.5% (don't ask!)
Why are you redeeming your current rate? I know you said don't ask However, even at the rates now available it sticks in the throat when I'm currently 2 years into a 10 year fix at 2.5% (don't ask!)
Sarnie said:
g4ry13 said:
My broker has not suggested 5 year products. I suspect that's because he gets commission every time I take out a product with him. If I take out a 2 year and then renew with him, that's 2x the commission for him? I could ask his view on the 5 year, but he's not Mystic Meg and it suits his pocket to sell me 2 products, rather than 1.
Doesn't sound like you like your broker much!Maybe ask him why he's advising a two year rate rather than a 5 year rate..........there might be an understandable reason for that rather than just future commission, which may not even happen.....
I will ask the question about the 5 year rates.
g4ry13 said:
He's a very pleasant chap when i've spoken to him on the phone. Although i'm under no illusion that he makes his money when I buy a product and renew with him!
I will ask the question about the 5 year rates.
Of course but that doesn't mean it affect's his advice....I will ask the question about the 5 year rates.
I don't think I've advised a client to take a 2 year rate over a 5 year rate in about 5 years......but thats based on my perception of risk of course
ThingsBehindTheSun said:
The two year deal is 0.39% higher than the 5 year deal. How much would rates need to fall in the next two years so that when you remortgage you would be better off over the remaining 3 years?
I would imagine that rates would need to fall at least 1% in the next two years for you to be better off overall. It is entirely possible, but who knows what is going to happen?
I think a lot of people have only known a base rate of 0.25% so think it is going to go back to this level over the next few years. It might do, but then equally it might not.
But the banks offering a lower rate over 5 years compared to 2 makes me think they are pretty certain rates will fall.
But by how much is anyone's guess and a gamble.
Unless rates significantly fall over the next two years I bet the 5 year and 2 year deals will work out fairly similar over the next five years.
There is certainly an expectation that rates are going to fall in the next few years. I would imagine that rates would need to fall at least 1% in the next two years for you to be better off overall. It is entirely possible, but who knows what is going to happen?
I think a lot of people have only known a base rate of 0.25% so think it is going to go back to this level over the next few years. It might do, but then equally it might not.
But the banks offering a lower rate over 5 years compared to 2 makes me think they are pretty certain rates will fall.
But by how much is anyone's guess and a gamble.
Unless rates significantly fall over the next two years I bet the 5 year and 2 year deals will work out fairly similar over the next five years.
Let's say in 2026 that rates are 3.5%. When you go hunting for mortgage deals it's about the bank's view on interest rates for 2026-2028 or even 2026-2031 and who knows then whether we'll be talking about rate hikes / cuts!
g4ry13 said:
Sarnie said:
g4ry13 said:
My broker has not suggested 5 year products. I suspect that's because he gets commission every time I take out a product with him. If I take out a 2 year and then renew with him, that's 2x the commission for him? I could ask his view on the 5 year, but he's not Mystic Meg and it suits his pocket to sell me 2 products, rather than 1.
Doesn't sound like you like your broker much!Maybe ask him why he's advising a two year rate rather than a 5 year rate..........there might be an understandable reason for that rather than just future commission, which may not even happen.....
I will ask the question about the 5 year rates.
Why not ask him what the commissions are?
g4ry13 said:
When you go hunting for mortgage deals it's about the bank's view on interest rates for 2026-2028 or even 2026-2031 and who knows then whether we'll be talking about rate hikes / cuts!
Just to correct this view - it's not the bank's view on what will happen to interest rates, but the money market rates for 2, 3 or 5 year debt that is the majority of the fix mortgage rate at the time you take out the mortgage (I'm being a bit simplistic but it's about right). Guessing future interest rates correctly is almost impossible.For example the current 2 year money market rate is 3.54% and the 5 year is 3.64%. These rates change all the time. A bank will go out and arrange a £200m tranche or whatever, and when its gone they set a new rate. Further details of UK government debt rates are here
https://tradingeconomics.com/united-kingdom/govern...
The longer term expectation is for rates to fall, and get to the r* or neutral interest rate. This means the rate when the BoE is neither working to expand or contract the economy. This would generally be x% above the longer term inflation rate. 1-1.5% above is often seen as this rate, so you could see rates settling around the 3.5% rate. Now trying to guess rates that far out is risky as no one knows what's going to happen so there is an element of unknowns in play (per poster above you can see it in SONIA but it can move alot even 2 year rates moved a chunk after the BoR hiked the other week). I'd have thought the first thing your broker would be doing is asking you about your attitude to risk and how you perceive payments.
I'm not sure a reputable broker is looking ahead to the next product they can flog you, but if they are pushing a product at x duration ask why they think that works for you. It is after all the product selected given your attitude to risk. I'd recommend doing some research into Monetary Policy and how banks fund mortgages - its all openly available on the net. It would help inform your own risk decision and likely assist when talking with an advisor.
I'm not sure a reputable broker is looking ahead to the next product they can flog you, but if they are pushing a product at x duration ask why they think that works for you. It is after all the product selected given your attitude to risk. I'd recommend doing some research into Monetary Policy and how banks fund mortgages - its all openly available on the net. It would help inform your own risk decision and likely assist when talking with an advisor.
Sarnie said:
wiggy001 said:
I'm in the process of fixing for 5 years because I simply looked at what the rate would need to be in 2 years time in order to break even and felt that it was in the "possible but might not happen" camp, and that was just to break even. Then factor in any potential fees in 2 years' time and the time to get it arranged plus the security of a longer fix and it became a no brainer for me.
However, even at the rates now available it sticks in the throat when I'm currently 2 years into a 10 year fix at 2.5% (don't ask!)
Why are you redeeming your current rate? I know you said don't ask However, even at the rates now available it sticks in the throat when I'm currently 2 years into a 10 year fix at 2.5% (don't ask!)
I did have a chat with my broker this afternoon. I have to admit that some of it went over my head and that i'm not sure I fully agree with him.
His reasoning for a 2 year fix is that with inflation coming out as 2.2% today due to the services sector that it makes further rate cuts more likely. From an economist's perspective, if inflation is going back up - it would make the BOE think twice about further reductions in interest rate.
The main reason he did not advise of the 5 year is because there are large exit penalties to getting out of these products and we don't know what the future holds. I think that's a bit obvious about the uncertainty which is why it has to be a calculated bet on the path of rates.
His reasoning for a 2 year fix is that with inflation coming out as 2.2% today due to the services sector that it makes further rate cuts more likely. From an economist's perspective, if inflation is going back up - it would make the BOE think twice about further reductions in interest rate.
The main reason he did not advise of the 5 year is because there are large exit penalties to getting out of these products and we don't know what the future holds. I think that's a bit obvious about the uncertainty which is why it has to be a calculated bet on the path of rates.
I've tended to go for the longest possible fix as I then know what my commitment is each month. For a few years pre-Truss I'd have been better off had I gone for trackers. But any gains would have been likely wiped out and possibly worse when Truss and Kwarteng did their thing.
I've got a fairly conservative attitude to risk though and only you know what motivates/concerns you.
I've got a fairly conservative attitude to risk though and only you know what motivates/concerns you.
Douglas Quaid said:
Are you going to be overpaying? At some point the 10% limit on overpayment is prohibitive if your fixed rate term is too long.
It's going to start off as a fairly lumpy mortgage (£300k+). I think it's unlikely that we'll be overpaying £30k in a year towards it. Maybe in 4 years time it may be factor, but I imagine it's unlikely to come into play.
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