I’m currently on the Standard Variable Rate, and I’m thinking of moving onto a 5 year fixed rate deal at 3.95%. This will add £1 to my current repayment. Is it not a no-brainer to move, given that interest rates are certain to rise in the next 5 years, or am I missing something?

no brainer I would say.

well they can’t really go down…

I’m looking into it. Reckon I’m 6 years from paying it off completely, so makes sense to me

A couple of years ago I was on a very low rate and move to a 10 year fixed rate just before the market crashed.

It was lucky as I missed the crash by a month but at the same time I know exactly how much I will be paying for the next 10 years. I like the fact that I know how much it is every month for so long.

TroutWrestler – who is that deal with?

RBS – existing customers only, <50%LTV, £199 arrangement fee. I think it might be available to anyone for £699, but not sure.

Ahh to have a less than 50 % ltv… intact 69.9 would do me fine !

just refinancing what’s left of the development loan on the barn and Mrs S and I have differing opinions (both finance/economists – it’s a riot in our house 🙂 ).

So we’re splitting the mortgage 50:50 between a 5 yr fix @ 3.95% (my choice) and a 2 yr fix 2.95% then going to SVR (hers). (we’re with RBS so same product as OP’s)

Bit of personal/professional rivalry – we’ll see who’s in or out of the money in 5yrs time.

Looks like a good deal. Interest rates will rise fo sure

I did a 5 year fix once and it served me well for 3 and a half years, but then it was cheaper to pay the redemption fee and switch.

Not sure if I would do a 5 year fix again.

However, with regards to the OP’s situation then I would definitely do it as it adds surety in the latter stages of your mortgage which is a good thing.

thats one of the advantages of a domestic fixed rate mortgage over a commercial product. The early redemption costs are usually a function of the balance outstanding and term to the end of the fixed period (i.e. 3% with three years to go, 2% with 2 to go etc) – in other words not connected to the swap differential in the market.

A commercial loan has a break cost which equals the cost of unwinding the swap rate. That means there’s almost no benefit for a commercial borrower to unwind a fixed position.

For a domestic mortgage you can find that the redemption fee is less than the real cost of closing out a fixed swap and going for a new variable or fixed deal. Which is very handy.

OTOH its almost unheard of that you can jump on a better value fixed product from a variable one.

Balderdash* Stoner, swap movements work both ways and the well advised commercial will get profits as well as pay for losses. The commercial borrower will still benefit if future floating rates are less than the forward floating rates. It is a zero NPV game at time of break subject to a small margin. Domestic one way only indeed, but banks generally make money on redemption as breaks typically driven by non interest rate sensitive motives.

* I am normally nice to you so thought I should right that.

^^^^

I guess that is a function of the competitiveness within the commercial and domestic markets.

Back in my trainee actuarial days I remember coming across these commercial mortgages (the company I worked for used to lend LOADS to GPs) and I asked a question about switching and then I was told about the cost of the switching penalty.

Your last point is interesting. Let’s say we were in a situation where inflation was high, but the central bank was very aggressive with regards to its monetary policy then we would have a yield curve that sloped down abruptly reflecting how inflation would be squeezed out of the economy. This would make 5 year rates much lower than current rates and mortgage providers should price accordingly.

However, given that most people do not know what a yield curve is they would take the extra margin and slip it in their pocket.

Sorry for going technical. I am just making sure that I can still work through the logic 😆

Gibberish!*

If you’re forced to break a swap position you no longer need, the redemption cost is the NPV of the remaining swap against the new market price.

I’ve had a client burn £30m on a an unwanted £200m loan swap. Made my eyes water.

*I challenge you to a duel of 1950’s exclamations!

mefty – I concede if the swap is in the money then yes, unwinding it would be profitable to the commercial borrower.

Im talking about when a swap is out of the money. For a resi mortgage its quite possible to make a profit from unwinding a swap that is even out of the money (because the redemption cost is not linked to the swap and market). Commercially its impossible.

The yield on a commercial loan is “locked” in as such.

This means that you can take the yield at drawdown and assume it applies until redemption and then use this within your asset/liability reporting to the FSA.

I have NO idea what the last few posts are on about.

HH – you’re talking solely as an issuer though, yes?

Stoner – Member
HH – you’re talking solely as an issuer though, yes?

Yes mate.

Troutwrestler – sorry 😳

It is impossible at the point of break if you fix again but not if you float and interest rates stay lower than the forward market at the time of break.

Which in fact is indeed the same as for a break of an in the money swap.

Mortgage you say 😕 ……………. Ah yes I seem to remember having one of those things. 😆

HH how does that yield get locked?

In practice on the borrower side I’ve always seen it as being forced to buy a swap for the money and then a spread over for the project. So say buy 5yr money at, say 350bps and then a 250bps spread over. That’s then set against a forecast drawing profile for, say a 4yr build. Thats why if you dont draw it in the shape youve forecast you have to unwind the 350bp contract.

When you say “yield is locked” do you mean the spread or the swap?

mefty – the ongoing cost of a lower variable rate my be cheaper, but you still have to pay the capital cost of the break.

What capital cost? Trust me, I know swaps – I used to price them.

the npv one if its out of the money….

are we going round in circles again? 🙂

anyway – we should grab a beer in London sometime, and bore anyone within a 50 yard radius 🙂

Stoner – Member
HH how does that yield get locked?

In practice on the borrower side I’ve always seen it as being forced to buy a swap for the money and then a spread over for the project. So say buy 5yr money at, say 350bps and then a 250bps spread over. That’s then set against a forecast drawing profile for, say a 4yr build. Thats why if you dont draw it in the shape youve forecast you have to unwind the 350bp contract.

When you say “yield is locked” do you mean the spread or the swap?

I am trying to remember now, it was a while ago.

We used to report the total value of the loans and the loan weighted yield at drawdown to our Actuarial colleagues who then used it in their valuation calculations.

Not sure if that means the swap or the spread is locked to be honest.

ah – sounds like pooled debt book yields. Keeping it simple for the actuaries 🙂

Stoner – Member
anyway – we should grab a beer in London sometime, and bore anyone within a 50 yard radius

I would quite enjoy that, honestly. Exercising the body is fun, but exercising the old grey matter is fun as well!

Shame I live up in Scotland.

did you used to ply your trade in Edinburgh then?

Studied in Scotland and then went to Norwich in the mid-90s and moved back up to Scotland in 2001 and worked for Intelligent Finance for 7 years.

How about yourself?

Say you have a loan of 100 and break costs of 1, then you have to borrow 101, but because interest rates have gone down, hence the break costs your cost of servicing that 101 to term is the same as 100 at the previous rate if you had not broken the swap, subject to minute swap margins. (Loan margins assumed to be static)If rates are lower than projected at break you make money.

cambridge and then to London.
Cut my teeth on some fantastic financially driven property deals which probably had something to do with bringing down the whole banking system according to the well informed socialists in here 🙄

Capital finance is only one bit of the stuff I get to work with. And I have clients in Africa, Middle East and Europe now doing various bits and pieces of modelling, some finance, some just operational.

along the way Ive been able to go into other sectors too recently, like Biomass Energy plants which was fascinating.

If rates are lower than projected at break you make money.

agreed

having re-read what you’ve written I think we might be arguing about two differnt types of swap – yours has been drawn I was using an example of one with an ongoing drawing profile that isnt to be used. My fault, sorry.

hamster poo

I’m currently on the Standard Variable Rate, and I’m thinking of moving onto a 5 year fixed rate deal at 3.95%. This will add £1 to my current repayment. Is it not a no-brainer to move, given that interest rates are certain to rise in the next 5 years, or am I missing something?

By fixing you are betting that you can judge the market better than the person at the Bank responsible for it.

TBH I always had SVR’s until trackers came along, and then I’ve had them since – currently 0.35% over base 😆

By fixing you are betting that you can judge the market better than the person at the Bank responsible for it

yes.

But it’s not the be-all and end-all. For many, fixed costs are valuable even if nominally more expensive.

I had to lose my 0.35% tracker when we sold the house to move to the barn. That hurt 🙁

Stoner – it was the “commercial” lending that broke my old bank not the “retail” side 😉

The colleagues in the commercial part of the bank also willingly took the high bonuses in the early to late noughties, but never gave any of it back when everything collapsed…

the only pitfall with fixing now is what are the rates going to be doing in 5 years time. It could be that 5 years from now they’ll be sky high (ie 10%) leaving you in a difficult position – wheras in 6 years they could be back to normal (so a 5 year fix makes sense in 1 years time)

as it is, no-one can really predict the market very well. I listened too hard to all the doom-and-gloomers over on housepricecrash and fixed last year at 5.09% for 5 years (vs a flex of 4%). Not a terrible decision, but the deal is still available so i’d have def been better off holding off for a year