Mortgage Length - 2, 5 or 10 years?

[fartingspartan]

Hi All,

I know there is no right or wrong answer - Personal preference, risk appetite etc - but interested in views of a collective.

Moving home - Purchase Price £460K, Deposit £150K = Mortgage of £310K

5 year deal - 1.69% (£1270) & 10 year deal - 2.44% (£1393) - Fixed with both being portable ie can move/use against another property and allowing 10% over-payments per year.

Can take up to 29 year term but likely go for 25.

I am going to model it out on a spreadsheet to see what it looks like but I cant see mortgage rates staying below 2% in 5 years - so 10 year deal seems sensible - I am unlikely to need to move again from this house - plenty big for now and any future possible changes.

Only thing I am not protected from is a) Not being able to afford a mortgage of this size and b) Dying - in which case I would face 6% penalty.

Other thinking is take the 5 year and overpay like hell - then at end either rates are still low and good stuff - or they are higher but I have brought balance down so net payment ends up lower.

Interested in thoughts - As I say - I know there is no right or wrong and we cant predict the future - But interested in others collective thinking.

Crowdfunding for decisions if you will!

Cheers

 

[Mercenary Keyboard Warrior]

Its really just appetite for risk. There are now 15 years coming on the market again as well.

The more risk adverse you are the longer the term. For sure if your chasing the lowest you will go for a short term, the risk being by the time thats up something has changed. There is no certainty you will get another deal at the end, or not pay significantly more.
The biggest risk in taking the longer one is the risk as you say of having to exit, if its like mine (also 10 year) the first 5 years are the high rate, the following 5 it drops 1% per year, so later on its almost negligable anyway.

No matter the length of the term, paying more off will see a reduction in interest so its always a good idea if clearing the mortgage, or giving yourself more headroom is the target.
You really need to compare the scenario where you pay the 10 year amount (£1393) even on the 5 year deal, how much better a situation would you be 5 years in. IE whats the benefit of taking the shorter term, are you significantly better off at that point, remember at that point you need the new deal.
Also really important is to compare your income (after tax etc) to your mortgage costs. The higher the percentage the more a longer fix will give you certainty. If its low then even if at the end of 5 years rates have gone up a lot (pure speculation) then the impact on your actual surplus post living expenses will be far less than if your mortgage is a significant percentage and it goes up.

A few points, just in case your not fully aware, the penalty is normally on outstanding balance not borrowed, so its going down all the time anyway. If you make large overpayments (say the 10%) you will actually pay off around 7-8 years in (specific timings move this around). Doing this you would pay no fees anyway. The level of overpayment is often 10% of the original balance, but some are of the start of the current year balance so need to check that specifically i fyou can see yourself making large overpayments.

 

[Randomface74]

I just do 2 year tracker, always worked out better than fixed so far. Basically whatever is the cheapest monthly payment right now. The money you save every month offsets the risk of future rate rises.

 

[Burned_Alive]

We were in a similar position and opted for the 5 year deal. Wasn't willing to commit to the higher rate over 10 years but wanted to ensure we knew what our payments would be over the next 5.

 

[montymint]

I too have opted for 5 years, with the Brexit uncertainty looming we'd rather know what we can afford and stick to it for 5 years, allowing the dust to hopefully settle.

 

[Syla5]

https://www.drcalculator.com/mortgage/

No need to model on a spreadsheet, just use this site.

 

[Terminal_Boy]

I just do 2 year tracker, always worked out better than fixed so far. Basically whatever is the cheapest monthly payment right now. The money you save every month offsets the risk of future rate rises.

Trackers have been a safe bet with the interest rate being 0.5% for nearly a decade. However, the uncertainty and potential finance chaos that Brexit could cause make a great argument for fixing your monthly pavement for at least 5 years.

 

[Kemik]

The other thing to consider is how long you expect to live at the property. If you move, you risk breaching the early repayment charge (which is heavy!).

 

[jellybeard999]

Trackers have been a safe bet with the interest rate being 0.5% for nearly a decade. However, the uncertainty and potential finance chaos that Brexit could cause make a great argument for fixing your monthly pavement for at least 5 years.

But those same risks are also known to the banks and will surely be calculated in to their model. Probably at a conservative estimate.

 

[Mercenary Keyboard Warrior]

But those same risks are also known to the banks and will surely be calculated in to their model. Probably at a conservative estimate.

The rate specifically the banks charge will be heavily influenced by what they can borrow at, if they can borrow long term at very low rates they will pass this on.

Building societies have a different balance they need members funds in order to lend to borrowing members.

 

[soulhunter123]

The 10% overpayment limit is a bit worrying. If you suddenly come into cash or the economy improves (ha!) then you might want to make more than 10% overpayments. That's what would really help cut the overall cost of the mortgage.

 

[Mercenary Keyboard Warrior]

10% is pretty normal level when there are fees involved for exiting. There has to be something otherwise they cannot charge a get out fee, which is their protection vs significant rate changes in your favour.

On mine and all I have seen you can pay above that, but if you do the excess has the penalty rate applied so its rarely worth doing.

 

[soulhunter123]

10% is pretty normal level when there are fees involved for exiting. There has to be something otherwise they cannot charge a get out fee, which is their protection vs significant rate changes in your favour.

On mine and all I have seen you can pay above that, but if you do the excess has the penalty rate applied so its rarely worth doing.

That's how they trap you, though. If you suddenly discover you can afford to pay more, you can't, or if you do they bleed you of the extra interest they're missing out on anyway. It's a bit of a con, in my opinion. Personal circumstances, of course, but I'd stick with a "free overpayment" mortgage.

 

[SGWills]

depends on how much you are overpaying. With my mortgage they advise it is capped at £1500 so I will just weigh up how much im expecting to over pay by the fee and go from there

 

[Mercenary Keyboard Warrior]

That's how they trap you, though. If you suddenly discover you can afford to pay more, you can't, or if you do they bleed you of the extra interest they're missing out on anyway. It's a bit of a con, in my opinion. Personal circumstances, of course, but I'd stick with a "free overpayment" mortgage.

Well its all relative, assuming its a 10% of original amount the OP is borrowing loan type, thats an extra £31k per year, its also normally a year based on the date of the loan, so often its far less of a years wait to pay another of the 10% off.

I have seen very few long term fixes, in fact even short ones that have no ERC, and if they have an ERC they will have a maximum overpayment otherwise there can be no ERC.
Put it this way the OP could pay an extra £2,583 per month and still be within the extra hes allowed to pay off annual with no fee.
You have to have some really really significant change in circumstances to have to worry about 10% extra per year not being enough. Arguably at that point you may well not care about the ERC

 

[tom_nieto]

We renegotiated another 5 year deal. Rates weren’t hugely different between a 2 year and a 5 year fix for us. Trackers were a bit cheaper, but wanted to fix given slight uncertainties coming at the end of the year. I wouldn’t want a 10 year fix particularly due to the higher rates, although I guess you might be laughing at all of us in 6-10 years when we’re all being repossessed. How much are you planning to overpay? I’d try to shorten the term as much as you can rather than overpay.

 

[Psycho Sonny]

OP - when do you think interest rates will rise?

if you think they will rise in less than 2 years then fix for longer than 2 years.

if you think they will rise in 2+ years time then fix for 2 years. then ask the same question again in 2 years.

the pound is tanking. the economy will take a battering. boris is in charge remember. personally i reckon we will go to negative interest to allow people who own homes they cannot afford from going homeless. after all the cost of homes in nice places is eye watering.

i'd say fix for 2 years. i base this on no deal brexit which is now guaranteed to happen.

The 10% overpayment limit is a bit worrying. If you suddenly come into cash or the economy improves (ha!) then you might want to make more than 10% overpayments. That's what would really help cut the overall cost of the mortgage.

how is it worrying?

he's paying £1300 a month which is £15K a year.

mortgage of £310k is £31K per year overpayment allowance.

you think it's worrying that if he somehow can manage to increase his payments from £15K a year to over £46K a year he will now be getting overcharged?

where is this magical quadruple the original amount going to come from?

if your worrying about things like that then you must know something about your future circumstances. which if you do then fix for 2 years or go on a tracker.

 

[Mercenary Keyboard Warrior]

There is talk of a rate rise end of this year wont be much if it happens though, its based on a smooth Brexit though so I would say thats looking unlikely, however if we have a hard Brexit it could well end up with a cut. They were aiming to get rates up a bit in order to give headroom to make cuts if required later.

If we have a very smooth, or even no Brexit I would expect rates to go up. There will be a bounce in the pound, inflation is already towards the top of the target and we would probably see a lot of activity in the economy.

A medium to hard Brexit is expected to bring a further pound devaluation, which will increase inflation as well, but the BOE will almost certainly ignore this as its imported inflation and hence hard to control with UK interest rates, ie a highly inefficient lever in this regard.

I always say to people to consider two options (and I reworded this a bit to avoid triggering Dowie)
Do you want to MinMax or MaxMin
Ie do you want to minimise your chance of paying the maximum amount, if so you fix for longest as the risk of very high rates is minimised. Or do you want to maximise your chance of paying the minimum, if so you take the best deal available, and keep looking, potentially even exiting that deal early. Or go in the middle as a sort of least extreme option, its all really just balancing risk vs reward.
Which really goes back to what I said earlier, if your mortgage to income is high you probably want some certainty, if its low you can risk some uncertainty.

To give some perspective on the devaluation of mortgage debt by year, a 2% annual pay rise would devalue the effective cost of the mortgage by 22% for the 10 year compared to earnings (assuming taxes etc are fixed). 3% would be almost 35%, so a rise at the end of the fixed period would already give a decent buffer from earnings growth. Yes you would see an increase in actual money going out, but in relative terms compared to day 1 you have automatically built a buffer.

 

[Mercenary Keyboard Warrior]

where is this magical quadruple the original amount going to come from?

its triple but yes as I said above thats one hell of a change to be worrying about not being able to pay off far more than that fee free

 

[Psycho Sonny]

There is talk of a rate rise end of this year wont be much if it happens though, its based on a smooth Brexit though so I would say thats looking unlikely, however if we have a hard Brexit it could well end up with a cut. They were aiming to get rates up a bit in order to give headroom to make cuts if required later.

If we have a very smooth, or even no Brexit I would expect rates to go up. There will be a bounce in the pound, inflation is already towards the top of the target and we would probably see a lot of activity in the economy.

A medium to hard Brexit is expected to bring a further pound devaluation, which will increase inflation as well, but the BOE will almost certainly ignore this as its imported inflation and hence hard to control with UK interest rates, ie a highly inefficient lever in this regard.

I always say to people to consider two options (and I reworded this a bit to avoid triggering Dowie)
Do you want to MinMax or MaxMin
Ie do you want to minimise your chance of paying the maximum amount, if so you fix for longest as the risk of very high rates is minimised. Or do you want to maximise your chance of paying the minimum, if so you take the best deal available, and keep looking, potentially even exiting that deal early. Or go in the middle as a sort of least extreme option, its all really just balancing risk vs reward.
Which really goes back to what I said earlier, if your mortgage to income is high you probably want some certainty, if its low you can risk some uncertainty.

To give some perspective on the devaluation of mortgage debt by year, a 2% annual pay rise would devalue the effective cost of the mortgage by 22% for the 10 year compared to earnings (assuming taxes etc are fixed). 3% would be almost 35%, so a rise at the end of the fixed period would already give a decent buffer from earnings growth. Yes you would see an increase in actual money going out, but in relative terms compared to day 1 you have automatically built a buffer.

what if you get a pay rise of 1% and inflation is at 3%?