Being advised to accept a high 6.4% @2yrs over 5.8% @5yrs #HELP

[soworriedaboutthis]

Hi all,

Long-time lurker and a first-time poster. As the title says I'm stuck between those two deciding rates/years. I'll lay out some background to clarify my circumstances and situation.

Background

I've been in a tough situation and separated from my partner, our house is sold and due to complete in early September. I want to move quickly and prefer to buy, rather than rent. My mindset is to fight through the shit storm and at least have a place I call my own for myself and 7yr olds sake. I start a new job next week. My current salary is 50k and my new salary is 72k. I have a limited choice of lenders available to firstly be able to go off my future salary and secondly borrow the amount I would like for the house that suits my needs and location.

I have secured an offer on the perfect property and AIP, I now need to figure out the best option between 2 & 5 years.

Advice

Given the state of things, the current market and the fact nobody knows where anything will end up I need to choose between the following:

6.44% @ 2yrs £1871pm | Secure a new rate @ 1.5yrs in. (Whatever the market dictates at the time)

5.79% @ 5yrs £1725pm | Early repayment y1-5%|y2-5%|y3-4%|y4-3%|y5-2%

My broker has been helpful and advised nobody knows the future and the decision effectively is up to me.

The main issue comes from two of my closest confidants, one who is a savvy Redditor and on UKPF every day and is adamant that 5 years is the way to go and how the situation is akin to 2008 but much worse and thinks the other confidant & banks are out of touch. The other is a mortgage underwriter who thinks 5 years is insane and I should go for the 2 years, who also commented that their CEO expects rates to drop next year due to just how unsustainable these rates are. They laugh at the fact I'd get advice from Reddit. Both are contrasting views and have some points.

I'm listening with open ears with the hope I can get some sound advice and reasoning on which way to go.

EDIT

Crunching some numbers, the 6.44% works out at £3500 more expensive over the two years, so effectively I would need the rates to drop enough at the end of year 2 to save more than £3500 on my new mortgage rate in year 3/4/5 onwards.

EDIT 2

Tracker could be an option also: Starts @ 6.19% £1815pm @ligerheart25 thanks for mentioning this.

EDIT 2.5

Even with my situation the best rates around were only 0.7% lower for the 2yrs and 0.2% lower for the 5yrs. Tracker was the best on the market.

EDIT 3

I think I should add some clarity to the 2008 comparison, he wasn't comparing the exact mortgage situation to 2008, his thought process was how the banks have been overleveraging on derivatives and creating an unsustainable economic situation - How 2008 happened is very different to what's happening now but the end result was an economic shit storm, so a 5 year seemed the most sensible option for that certainty. Big banks are greedy, shock!

LAST EDIT

Thanks for all the input, thoughts and personal opinions. I flipped between the tracker and 5-year ALOT and decided the 5-year fixed offers stability and security, so is the best option for me. I could easily see the tracker working out well but I could easily see it not going well. The state of inflation and the possibility of hyperinflation scares the hell out of me and as someone rightly pointed out is it worth gambling your home over as a single parent? it absolutely isn't! Ideally, we all want to min/max our money and have the perfect outcome but as we're all aware, none of us know the future.

In 5 years time, if rates hit 2% again (I be dreaming), life will be sweet having lived perfectly fine on 5.79% and I'll take the longest damn mortgage term I can.

 

[simplyconfused]

@soworriedaboutthis I'm afraid there is no easy answer. Nobody knows the future rates. It WILL be a risk that you have to accept. The decision is up to you.

 

[soworriedaboutthis]

@simplyconfused Yup, #cryface - tough decisions !thanks

 

[barefootrev]

@soworriedaboutthis Although it was my only option, as someone who fixed for an abnormally high rate in early 2021 (3.99% for 7 years), I would not have even known if rates had gone down to zero whereas I'd be regretting not fixing for the longer term if they had gone up this year!

I guess the real question is would you pay £120/month insurance to avoid the chance of rates hitting 10% or more like they did in the 80s?

 

[yadayah]

@soworriedaboutthis > adamant that 5 years is the way to go and how the situation is akin to 2008 but much worse and thinks the other confidant & banks are out of touch

2008 was when interest rates started plummeting and it was a terrible time to be on a long fix. Maybe ask them to clarify their thinking.

 

[soworriedaboutthis]

@yadayah

I think I should add some clarity to the 2008 comparison, he wasn't comparing the exact mortgage situation to 2008, his thought process was how the banks have been overleveraging on derivatives and creating an unsustainable economic situation - How 2008 happened is very different to what's happening now but the end result was an economic shit storm, so a 5 year seemed the most sensible option for that certainty. Big banks are greedy, shock!

!thanks

I replied to another comment but just incase I'll copy pasta the response for clarity with the 2008 bit:

I think I should add some clarity to the 2008 comparison, he wasn't comparing the exact mortgage situation to 2008, his thought process was how the banks have been overleveraging on derivatives and creating an unsustainable economic situation - How 2008 happened is very different to what's happening now but the end result was an economic shit storm, so a 5 year seemed the most sensible option for that certainty. Big banks are greedy, shock!

 

[ligerheart25]

@soworriedaboutthis I haven’t crunched the numbers, so just assuming your calculations are correct. I am a strategist on a trading floor at one of the major investment banks. Views are my own.

Here is how I view it:

- UK base rate is 5.25%. The Fed have announced they do not intend to cut rates any time soon. I think Bailey has said the same. Everyone has only a short term memory on rates and these rates are near historic norms. The mandate for the central banks is to crush inflation, not cut rates.

- The entire point of rates being where they are *is to cause pain* to mortgage holders. The only two reasons the BOE will drop rates are (a) serious recession and (b) UK treasury unable to afford the rates. Hurting home owners / other borrowers is the entire point higher rates, to take cash out of the economy, reducing the demand side of inflation.

- You have a spread of 0.55% to your 5Y and of 1.15% to your 2Y.

- If we assume UK base rate isn’t cut for the next 12-18mo - and my personal assessment is it’s unlikely unless we get a serious fall off the cliff in the economy - then rates remain at 5.25% when you remortgage. The spread will probably remain around 0.5%.

- You’re losing money on the 2Y fix (vs 5Y) to take the bet that the curve will be lower in 2Y time. It might, but i doubt it will be lower by enough.

- You can still pay off up to 10% a year in either option with no penalty. This reduces the total £ interest owed instantaneously.

- You need rates to be approximately 0.25% lower than your 5Y offer - so 5.5-5.6% - in order to save money in the subsequent 3Y. Very back of envelope.

It’s very tricky because I think rates are both unlikely to go up a lot more, but unlikely to decrease a lot. I would probably go for the 5.8/5Y fix, but more likely would go for a tracker for 2Y and review Then. Tracker should be lower than the 6.4% you are being quoted. It doubles down on the rate cut/low hike scenario but gives plenty of head room (let’s say tracker is 5.5%, has upside risk but has headroom vs the 6.,4%… not sure what actual tracker is)

 

[soworriedaboutthis]

@ligerheart25 !thanks

This was my general feeling last week until the confidant who works as an underwriter called me insane haha

 

[ligerheart25]

@soworriedaboutthis Hadn’t finished typing, so just added edits

 

[soworriedaboutthis]

@ligerheart25 !thanks

For some reason a tracker hasn't been mentioned but the reasoning works, I just asked my broker and starts at 6.19% £1815 - I agree, risky but has more potential, than the 2yrs given the numbers.

 

[dreynar]

@ligerheart25 I also don't understand why people think rates will decrease massively. Historically the ultra low just above 0% rates are the aberration not 5%+ rates. There would have to be another serious financial event for rates to go back that low again.

 

[abanks125]

@dreynar Because of the house price to income ratios, people maybe hoping rather than thinking but the ratio of house price to income means 5%+ is higher than it used to be

 

[resjudicata]

@abanks125 All that will happen now though is wages slightly catching back up with house prices, (either through them falling or stagnating for 5-10 years)… I’m thinking where I am now is where I’m going to be for the next couple of decades as a result

 

[julia736]

@ligerheart25

You have a spread of 0.55% to your 5Y and of 1.15% to your 2Y.

Is there any chance you could elaborate on this please?

 

[mariaisabella]

@julia736 Spread is the premium being paid to the risk free rate I.e. base rate

 

[julia736]

@mariaisabella Thanks. It seems like the word spread has multiple uses?

EDIT: wait! I thought the base rate was the rate for overnight deposits at the Bank of England. So in this context spread means the interest rate premium which applies to the term of the loan? (I think I got all those words right?)

 

[mariaisabella]

@julia736 What other contexts have you seen it in?

 

[julia736]

@mariaisabella Well, I'm most used to seeing it in terms of currency exchange.

You "pay a higher spread" if you want to exchange your dollars for - IDK, the Mexican peso? - than you do if you do if you want to exchange your dollars for sterling or euros.

And there's a large spread on gold, I've read here in the past.

That makes sense to me because it's the difference between buy price and sell price (and I guess this subsidises market makers, who take a risk by buying from you and offloading the currency to someone else?) but it doesn't quite intuitively make sense to me when applies to loan terms. Like maybe it'll click for me in the shower or something overnight, but not immediately here and now.

 

[mariaisabella]

@julia736 Yes so what’s you’ve described there are bid-ask spreads which relating to market making in securities and financial markets - they are relevant to trading and are where sayings like “buy low, sell high” from.
Then you’ve got credit spreads which are the difference in the (interest) rate issued by say a business borrowing money, a corporate, and the interest free rate you could deposit your money at in the bank and earn a return on (or any other reference rate deemed to be risk free). This spread reflects the liquidity and risk premium between you buying that corporate bond and the risk of it defaulting vs you buying a treasury bond or depositing it in a bank.
That’s kind of what you’ve got here with mortgage rates except here we are the borrowers as consumers - rates will be a reflection of future swap rates predictions over the next however many years and are impacted by inflation expectations too - if inflation is expected to persist then you can expect raise to remain high or go higher in an effort to curb inflation. The spread here is reflects that expectation of future rates.
Hope that helps - others will correct me if I’m wrong or worst case, look on chat gpt haha

 

[julia736]

@mariaisabella Thanks very much. So really spread just means variance and it's contextually dependent?

When you say "you have a spread of 0.55% to your 5Y" you mean "the interest rate on your 5-year is 0.55% above the base rate"?