Does it make sense to get a two-year fixed interest mortgage?

What happens if interest rates go up and you are not able to remortgage, or if house values decline? Sounds like a high risk proposition.

Asked by Richard

3 Answers

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Answered by Darren Smith, IFA in Basingstoke, HAMPSHIRE
when choosing between fixed or variable the question really is:

do i want to budget my costs to set amount (fixed) or can i afford to ride the market and suffer any increase if it happens (variable).

when considering the term of a deal its generally better to tie this in to a future event ie spouse/partner returning to work after having a baby or promotion due at work etc

this way you are less likely to get stuck on a merry go round of rate chasing.

the only exception is that one or two lenders will offer the option to take a variable rate and then switch to a fix even during the term (peace of mind option) or there are still the odd capped rate deals available but you must have a good deposit to qualify for them.

if anyone tells you they can accurately predict interest rate changes and qualify how they determine them, they are not being honest with you.

much was made of Soros making £1bn betting against the £ but he didnt do that with knowledge and certainty, it was a risk rated decision. he later reversed the profit substantially when he tried to bet against other currencies! | 01.12.11 @ 00:15
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$commenter.renderDisplayableName() — {comment} | 09.24.17 @ 03:15
Answered by D C, IFA in Bristol, DEVON
An interesting question. When you take a fixed rate deal you are gambling on the average variable rate you would have paid being equivalent to the fixed rate. Let me explain.

Let us imagine a £100,000 interest-only mortgage, with the choice of 3% variable or 4% fixed, with a 2-year special rate. In this example, after 1 year the variable rate jumps by 2%, to 5%.

At 4% the interest-only payment is £4000 each year, a total of £8000. The variable rate payment is £3000 in the first year, then £5000 in the second year - also a total of £8000. In other words, the average interest rates are identical. So how do you choose between them? Just compare the interest rates of a variable rate loan and a fixed-rate loan over the same period. Then double the difference between them, and if you think that interest rates will not rise by that much, then the variable loan is likely to be better. In the example given the difference was 1%, and the rates would have to rise by over 2% for the fixed rate loan to be the better bet.

Now this is a simple example, but the principle is correct, assuming a uniform rise in rates. The question is: would it make sense..... and the answer must depend upon your need to stabilise your finances, how much you could bear a rise in mortgage costs in the short term, and your view on interest rates in general.

Let me also stress the importance of considering the rates that will be imposed following the fixed rate period. If the rate is a competitive one, then you should not have to remortgage, but if the rate is poor then, as you have said, you may wish to remortgage but be unable to because of house values or your own financial position. To be on the safe side, though, do work through the position should mortgage rates have risen a few percent at the end of the special rate - can you afford it?

| 01.12.11 @ 00:54
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$commenter.renderDisplayableName() — {comment} | 09.24.17 @ 03:15
Answered by Paul Ross DipPFS CII(MP&ER), IFA in Bourne, LINCOLNSHIRE
Interesting answers from Darren and David.

The other point I would like to add to this is that analysts anticipate that interest rates will remain very low for longer than expected. I am advising my clients to consider a tracker rate, especially if they only wish to aim for a 2 year deal. Fixed rates are, on average, 1% higher than tracker deals, however this is subject to how much equity / deposit you have. | 01.12.11 @ 09:18
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$commenter.renderDisplayableName() — {comment} | 09.24.17 @ 03:15
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Answered by

Darren Smith
Darren Smith, IFA in Basingstoke, HAMPSHIRE

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