and you’d just read this. http://www.theguardian.com/business/2015/mar/24/uk-inflation-hits-zero-for-the-first-time-on-record

….and your options were something like a 2 year tracker at 1.4% (initially), a 10 year fix at 3.3%, or something in between.

and the difference in payments between those two extremes was about £120 a month.

what would you lean towards?

asking for, er, a first time buying friend, who just had an offer accepted on a house yesterday 🙂

A long fixed is good .I know it cost more but you have piece of mind that if you can afford it the cost is set in stone for a long time .How much is the early redemption figure though ? Cost my GF 2.5k to settle a 2 year fixed 3 months early and they wont negotiate on that as we asked

I’d go for the two year tracker. Things are unlikely to change dramatically in two years and if you’re moving into a new house you’ll be glad of the extra £120 a month. Do that, get settled then arrange a longer term mortgage once the two years is up.

I should point out that this is based on nothing more than what i would do.

As a rule you tend to do better long term with variable rates but as a first time buyer I’d say fixing for a long time was a good option. It might be a little higher now but rates will go up one day. Nice to be secure. Also 3.3% might be a higher rate but it is still very low in lending terms.

We took a mortgage out 6 years ago for a 5 year fixed rate and did look at going with a tracker then. With hindsight a tracker would have worked out far cheaper and as things turned out very low risk. At the time we wanted low risk and hindsight is a wonderful thing!

A year ago we renewed our mortgage and were faced with the same decision fixed rate vs. tracker. At that point rates were looking to rise and so we went with a semi fixed rate at less than half the APR of our first mortgage. Again as things have turned out a tracker would have been a better option!

That said we are happy with what we are repaying and in fact over paying so I guess its all swings and roundabouts ….. maybe.

It all depends on how much of a cushion you have. If the repayments are anywhere near the limit to what you can afford, then fixed is the way to go. If not, then a tracker might be a good idea. With interest rates at 0.5% they’re only going to go one way, and although I have no evidence or explanation, I suspect that once the low interest rates, low inflation bubble (if you can call it that) bursts, they might go up quite a lot quite quickly.

£120 month more for at least 24 months. That’s nearly £3k there alone, what is there to think about?

@Drac,

my fear (perhaps unfounded) is that you take the 2 year tracker, then after 23 months interest rates go up and all the nice cheap fixes are no longer available…

I would lean towards the 2yr and overpay the mortgage with the £120

Rates will go up at some point but who knows when. You’ll have around £3k less of a mortgage in 2 years.

You’re not always better off with a long term fix. 4 years ago our fixed rate came to an end and an advisor tried to get me onto another with the argument of knowing what the payments were, rates are bound to go up soon etc.

I took out an offset tracker and needed rates to stay the same for only 5 months to be better off. 40 months later the £200 odd extra I would have paid has meant the mortgage is now nearly £10k less than it would have been.

The offset helps as well, with savings rates so low all our short and medium term money is offsetting and overpaying as well means we are due to pay it all off 12 years early.

my fear (perhaps unfounded) is that you take the 2 year tracker, then after 23 months interest rates go up and all the nice cheap fixes are no longer available…

Mean time you’ve saved £3k.

I would stick on the lowest variable rate you can – you can get some pretty lw rates, or at least you could 9 months ago. I changed mortgage about 9 months ago and went onto a very low variable rate. I considered a fixed rate but the best medium term and long term fixed rate deals were at least £150 – £200 more a month – and all that extra cash is just going on interest so absolutely no benefit to me or paying down your mortgage capital any quicker. With interest rates very unlikely to go up this year, that’s almost £2k more in one ywar you’d be paying off for no benefit whatsoever.

Following the recent global crash caused by the financial sector we now all know that there is no such thing as financial experts – they’re guessing as much as we are. Slightly more educated guesses granted, but guesses just the same, and as many get it wrong as get it right. However there seems to me more and more in the news about low interest rates sticking with us for longer than we thought due to the slowdown in China and the slow pace of the Eurozone picking up (I know nothing, just regurgetating what i’ve read in the press), so i’ve come to the conclusion that its probably a good bet to stay on a low variable rate mortgage for now. It’s a risk, but previously i’ve always fixed in and I reckon its cost me thousands over the past 10 years compared to going for another product. Just pick one you can duck out of without any fee’s or charges so you can move as soon as rates look like they’re going to go up.

As a rule you tend to do better long term with variable rates but as a first time buyer I’d say fixing for a long time was a good option.

This is not always good advice for first time buyers.

Most first time buyers enter the market with a high LTV (80%-90%) and as such the interest rates that are offered to them are at the highest end of what is available.

If you fix for a long period, you’re stuck on that high rate for a long period. If you fix for a shorter period, you’re able to take advantage of the lower rate that a lower LTV attracts when you re-mortgage.

Of course, tying in to an affordable payment now is a form of insurance for first time buyers, but potentially at a VERY high cost (rates for a 5 year fixed on 90% LTV are about 4-5% I think).

If you’re serious about a long fix, double check portability and redemption fees. Personally, I’d aim for short term (which should improve your chances of approval since it’s more affordable), and overpay (having checked % limits).

Personally, I’d go for the fixed – but when I buy (next year fingers crossed) I’ll be staying put for at least a 10 stretch – I hate moving and my circumstances / requirements are unlikely to change in that time.

Anyway, I’m reminded of a old, old mate of mine I used to work with in Royal Bank, he bought his house sometime in the 80’s, he met with the Staff Lending Manager who talked him through all the different mortgages he was able to have – back then staff loans and mortgages were incredible value – anyway – he picked 25 year fixed rate, the lending manager said he was mad, it was £x a month more than he could pay on another deal, his colleagues said he was mad, but he was a sensible type – he could afford the repayments on the fixed and all things being equal he could always afford the repayments so he went for it a few years later rates nearly doubled. He reckoned the only time he really lost out on rates by any sort of meaningful amount was in the mid 2000s when they fell to 3.75% BOE for a few months, but by then he had literally months left to go and his mortgage was so tiny compared to the standards of the day he laughed it off.

I suppose if there’s a moral to this, it’s that lots of people think very short-term about very long-term things – like signing up for a quarter of a century of mortgage payments – even now in post-crash UK no lessons have been learned really – people think property is a no-lose gamble, prices will always rise and so will the economy so if their mortgage goes up £300 in 2 years time, it doesn’t matter they’ll be earning far more by then – but it doesn’t always work out that way – IMO the facts are this:

Interest rates are lower than they ever have been.

Whilst theoretically they could go down, they probably won’t and if they do it won’t be for long (relative to the length of a mortgage).

3.3% is below even the ‘New Normal’ of 3.5% which the BOE says is it’s target base rate.

Every major recession since the dawn of time has been followed by periods of higher than average interest rates – and our economy is booming – it’s only an iffy Europe and hugely deflated oil prices that’s stopping a rate rise – Mark Carney actually recommended a rate rise when unemployment fell to 7% – it’s currently 6.6%.

I’ve always had trackers or discounts and see no reason to ever change. Overpay when rates are low, like now, then scale back the overpayments if/when rates go up. You’ll end up tens of thousands of pounds better off over the lifetime of a mortgage.

Try to avoid fees, or keep them to a minimum – paying some grasping bank £2,000 (or whatever) to give you the opportunity to pay them interest for 25yrs is the definition of madness! Swap current accounts if it gives you access to linked deals (Nationwide, HSBC and Santander usually have some).

Fixed rates are always fixed high, in the long run you’ll pay more. And they always come to an end, so any certainty they provide is limited.

Mean time you’ve saved £3k.

But if you then have to pay more than the 3.3% available today (fixed for ten years )for the remainder of the mortgage you could be substantially worse off by the end of the term.

… And the £3k figure is based on the rate now but it is a tracker so the actual figure may well be a lot less than that. I suspect you would be better off on a tracker but you could end up worse off, is that a gamble you can take? At least with the fixed you know exactly what you will pay for the next 10 years.

Like the low rate trackers, just got one myself.

Not sure about overpaying though until my bank interest (2.4%) is lower than my mortgage rate 1.85%.

That will depend on your circumstances and your interest own rates.

Rone you are likely paying more interest in the mortgage due to the length of time it’s outstanding.

thanks for the advice all, it’s genuinely appreciated!

in the end we found a 10 year fix at 3.1% (about £100 more P/M), it turned out that the fees on the tracker were £700 more than the fix, and my wife has no appetite for risk anyway (nor for going through the whole rigamarole again in 2 years). So we plumped for the fix.

Fun times. I never minded this 1 bed flat but now i can’t wait to get out of it 🙂

and my wife has no appetite for risk anyway

This is key.

For some, just knowing that they’re safe from downside risk outweighs any potential upside risk.

For others, saving money is the main concern, so tying to a rate and then seeing that you could be paying less would drive them absolutely potty.

Kryton – I thought if you had savings, and if the rate beat your mortgage rate then you may as well save until the situation reverses the other way around and then use the savings to pay off mortgage?

Two year fixed and stick the 120quid you have spare each month into an ISA or savings account. Then in a few years its coke and hookers time!!!! i suppose you could also pay a chunk off the mortgage or keep it for a rainy day.

Kryton – I thought if you had savings, and if the rate beat your mortgage rate then you may as well save until the situation reverses the other way around and then use the savings to pay off mortgage?

In essence, yes. If you have say £100k in a mortgage for 25 years, and £5k in savings for the same period earning greater interest. But if that £5k/interest rate won’t be there until the end you could pay it off saving 25 years of interest on £5k, which would be quite a lot.

Kryton – I thought if you had savings, and if the rate beat your mortgage rate then you may as well save until the situation reverses the other way around and then use the savings to pay off mortgage?

That is correct, but generally that’s not the case and you need to be careful with the quoted interest rates and make sure that you are comparing the net savings interest rate (headline savings rates are quoted gross) to the mortgage rate. In the case that you have listed if you are a higher rate tax payer then your savings rate would be 1.44% net so saving might not be such a good idea. This will all change with the changes to interst on savings that was announced in the last budget.

Or invest it in a Fundsmith ISA?!

Or invest it in a Fundsmith ISA?!

Yeah, because nothing bad ever happened as a result of financial leveraging!

By all means if you want to take the risk then it’s up to you, however you have to understand that it is a risk and anyone who say’s that it’s not is the probably same sort of person who was selling annuity backed mortgages in the eighties!

As for the OP, if you really want to compare the two deals then what is the interest rate at the end of the two year fixed. That should help you make up your mind. Personally I wouldn’t fix for that long but your attitude to risk might be different to mine.

🙂

Well I was referencing the seemingly frequent suggestion that Fundsmith is the way to go for anything investment-wise. Of course it’s not unusual to invest in order to pay off mortgages, ISA mortgages were very popular but seems repayment more so now. FWIW I did better out of investing rather than paying off the mortgage by quite some margin but it’s perhaps not for those less financially aware.

Repayment is popular now because of the shortfalls that occured with annuity backed policies that were sold but came up short when the policies matured and left people having to find large amounts of money to pay off their mortgage when they were expecting a windfall.

You did well out of good luck due to the timing of your investments, deciding against such a policy and going for straight repayment is nothing to do with being financially unaware, rather it is to do with what risks someone is prepared to take with what investments.

variable

http://www.bbc.co.uk/news/business-32050654

interest rate will be low for the foreseeable because the economy is stuck in 2nd gear

FWIW I did better out of investing rather than paying off the mortgage by quite some margin but it’s perhaps not for those less financially aware.

Enlighten us then 😀

I could go for a little risk, but I wouldn’t bet my house on it knowing that I and only I will be paying it off (not expecting any windfalls or inheritance from either side of the family). All tips appreciated!

You did well out of good luck due to the timing of your investments

Stock market averages greater returns than mortgage rates over the long-term so that’s no issue, annuity mortgages were not so good due to the high costs as much as anything.

going for straight repayment is nothing to do with being financially unaware

Well if you’re not financially aware it’s best not to start picking investments you know nothing about – and may start worrying about. Some financially aware people may choose repayment mortgages of course. I ended up paying my mortgage off just because I could, if I’d been more comfortable with risk I wouldn’t have but it created a good balance with the amount I had invested.

Enlighten us then

Well you could do worse than look at hargreaves lansdown’s Wealth 150, I also use Close Brother’s scoring info on funds. I used to work out annualized returns but got bored with that – averaged around 8-9% returns over last 15 years though, my mortgage must have been around 4-5% over that time – I have a base rate tracker offset mortgage of 0.49% over base rate (which I don’t owe much on now).

Well you could do worse than look at hargreaves lansdown’s Wealth 150

That’ll be the same Wealth 150 that omits Fundsmith, because Mr Smith refuses to bribe pay HL to include him in it? The Wealth 150 is a marketing tool, nothing more, nothing less. I wouldn’t base my investments on that any more than I’d take much of the advice dished out on this forum – free advice is generally worth what you paid for it.

Also, HL’s fees are exorbitant.

yeah- I’m with II.

That’ll be the same Wealth 150 that omits Fundsmith

You’re talking about the 150+ which has lower fees for clients.

Key word in all of that; average. If you get the timing right, then yeah you’ll be quids in, however if the timing is wrong and you are unlucky then it may well be a different matter.

Given that most people will be looking at 20 to 30 years anything that looks dramatic in the short-term will look like a blip in the long-term. Most would drip money in monthly so unlikely to be hit too hard by a fall, I’ve been through Black Monday, the tech boom/bust and the banking crisis.

http://www.theguardian.com/business/2016/feb/09/global-economic-woes-delay-uk-interest-rate-rise-2020-bank-england

well, 8 months in and that 10 year fix looks smarter every day… 😕 🙄 8)

In exactly the same position, although mine was a remortgage. But still you can’t predict the future for good or I’ll.

So tracker peiple ….

Whats your tracker rate on mortgages taken out in the last 6-12 months ?

When i looked what was availible to me was only 0.75% less than the lowest 5 year fix availible to me ,,,

Back to the original question….. “If I had to choose a mortgage today” it would be completely different to your mortgage as my house needs, family needs, work needs and other personal circumstances will be completely different to yours. Hence a 19 year a 4 month capped rate with cash back and free mortgage survey might not suit you?!?!?!