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

[mariaisabella]

@julia736 Yes, in this case it’s the difference exactly. Though as someone who works in risk management, variance can mean something else but let’s not go there

 

[julia736]

@mariaisabella Thank you very much.

 

[faithiskey]

@soworriedaboutthis Do with this what you want but the earnings for the lender are 0.83% p.a. on the 2 years and 0.92% p.a. on the 5 years.
So the 5 years looks a bit more expensive but not materially

Source: I’m using SONIA swap rates to work out the cost of funding for the bank

 

[soworriedaboutthis]

@faithiskey !thanks

 

[julia736]

@soworriedaboutthis If the bank thinks that the average interest rate over the first two years will be the same as the average interest rate over the longer period then they will nevertheless charge more for the longer loan to account for the risk that they might be wrong and rates might rise.

This is called a risk premium and it's a fundamental of fixed-interest finance. The fact that you're being offered a cheaper rate for the longer term loan means that the bank(s) think that rates will fall over the period - the fixed-interest loans market in the City thinks that interest rates will fall, and you'll be able to remortgage cheaper in 2 years time.

However, the point of the fix is that it buys certainty - you know exactly what the rate is going to be for 5 years, and you don't have to worry if you get it wrong.

Your mate who's a mortgage underwriter might have more money than you and be able to afford it he's wrong and if rates go up.

Another thing I will say is that the rates we experienced between 2010 and 2020 were ahistorically low - lower than they have been in literally 750 years or more.[sup]PDF[/sup] Current rates are not extraordinarily high - although the Bank of England intends to try and get them back down again, current rates are more or less normal, and it's not certain that they won't remain high for some time to come.

I think there are people in the City (I think Matt Levine at Bloomberg has written about this) who have forgotten what interest rates are normally like - a sort of "institutional memory loss". If you're in your late 30's or early 40's and you've worked in the City all your professional life then you've spend most of your career dealing with the anomalously low interest rates of the 2010's, and interest rates weren't that high in the late 90's (??) and 00's either. The City isn't that used to interest rate shocks at the moment, as might be inferred by what happened with gilts and pensions in late September last year.

I get criticised here sometimes for saying you should invest in the stockmarket instead of overpaying your mortgage (this depends on the circumstances) and IFAs and others sometimes tell me that this is too risky. But the risky thing here is to take the shorter fix - the longer fix buys you certainty. And when the longer fix is cheaper, then this is cash in your pocket now when you need it (which you can invest in your pension if you wish).

 

[soworriedaboutthis]

@julia736 !thanks. Some good pieces to read and digest.

 

[ctiffany]

@soworriedaboutthis I think a mortgage is one of those situations where you should care a lot more about protecting yourself from any downsides instead of hoping for some upside.

Your mortgage payment going up £500 per month would cause you a lot of pain, especially if you already stretched for it.

Your payment going down £500 would be nice, but nowhere near enough to outweigh the pain if it goes the other way.

Given that, I’d recommend the 5Y fix.

 

[soworriedaboutthis]

@ctiffany !thanks

 

[kylee224]

@soworriedaboutthis Pay what you can afford. We have fixed for 5 years for certainty with our repayments for a long period of time. Accounting for inflation and pay rises, I don’t mind fixing on what looks like a high rate now so we can breathe for a few years. Nothing is guaranteed.

I have a friend that fixed for 2 years not too long after Kwasi Kwarteng’s infamous budget, and now he’s kicking himself because his broker convinced him that rates were sure to drop in that time. He’ll be going from 3.6% to 5.9% next month.

It’s basically a lottery. If you’re willing to gamble, fix for 2 years. But bare in mind just how wrong things can go in a short space of time.

 

[soworriedaboutthis]

@kylee224 !thanks. I'm just trying to figure out if I'm playing poker or roulette while gambling haha

 

[lostangelwings]

@soworriedaboutthis Nobody looks after your money as well as yourself.

 

[soworriedaboutthis]

@lostangelwings You're god damn right:

https://imgur.com/im05tfC

!thanks

 

[jasdaz]

@soworriedaboutthis Not advise but cautionary tale?

Mortgage advisor in early 2022 recommended a tracker because the rates were much better and all of my previous fixes had been consistently higher than tracker rates. Sure, i could have been paying a lot less in the past on a tracker but whatever.. I had a clear set amount to pay each month, which I knew I could afford and budgeted around it. That potential (and historically correct) overpayment in interest was worth that certainty for me , so i fixed at 2.6% for 5yrs. Thank fuuuuuuck

 

[soworriedaboutthis]

@jasdaz !thanks

 

[leeza]

@soworriedaboutthis I would think a key factor here is when you remortgage you will hopefully have a choice of a wider range of lenders as you will have been in the job longer (assuming it goes well)?

I don't know whats currently available, do you know how much better rate you could get if you didn't have a limited choice of lender?

 

[soworriedaboutthis]

@leeza !thanks

This is a good point. I'm in the civil service, this is a promotion to a different department and I'm not on probation. So this job is permanent (effectively) and I'm good at my job (if I say so myself haha) another thing to add to the weight of my decision between a tracker vs 5yr. The 2yr is removed from the equation for me.

 

[leeza]

@soworriedaboutthis No problem, we had a similar choice and went for a 2 year when buying out new build as only a couple of lenders allowed for the gifted deposit from the developer that we were using, so I figured in 2 years we could get a better deal most likely. However that wasn't during such a tricky period for interest rates!

 

[soworriedaboutthis]

@leeza He just got back to me. 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. I wish things were clear cut but alas I need to break out my crystal ball and risk it for biscuit either way.

 

[leeza]

@soworriedaboutthis Personally I feel slightly more comfortable taking the thing that is a competitive offer, however as others have said it's about whether you can take the risk personally in doing that and how much of a rate rise you can swallow if it does go wrong.

 

[alabasterjar]

@soworriedaboutthis It is really up to you, best way to think about it:

Option 1, 2 years: Cost more pcm but you are gambling interest rate will go down do that when you remortgage you get a better rate, how much would rates have to drop for it to be worth it? 2/4 %?

Option 2, 5 years: Cheaper but also more stable, you’re going for stability, you may still benefit from lower rates but only later, although it covers you for from having to pay more sooner.

I would go for 5 years but secure what you have now instead of waiting, unless £150-£300 more pcm makes no difference to you, then gamble.