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My husband and I are first time buyers are are looking at mortgage options but I'm unsure which option is preferable. We only have a 5% deposit so are being hit with not great interest rates.

Our mortgage advisor has said that the length of the mortgage won't affect the rate in our case, this would be 3.6% for a 2 year fixed mortgage or 3.8% for a 5 year fixed mortgage. For overpayment we would be capped at 10% of the outstanding mortgage value per year for the fixed term, then uncapped.

The questions are:

Is it best to go with a 2 year or 5 year fixed rate at the available percentages? I'm unsure whether fixing for 5 years at 3.8% is preferable to avoid interest rate rises, then potentially remortgaging after 5 years is best, or fixing for 2 years and remortgaging after that hoping to get a better rate due to higher LTV but risking interest rate rises sooner.

Also, is it best to go for a 20 year mortgage with a higher monthly repayment and less overpayment vs a 30 year mortgage with lower monthly repayment and more overpayment (we can afford the monthly repayment on the 20 year reasonably comfortably).

We would more than likely be living in the house for more than 5 years but would at some point down the line be looking to move/sell.

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    It is best not to go with any of them. Interest rates WILL raise and unless you can handle twice the interest rate - bad bad bad. Also, your question depends on your projection of future income - which you provide no information of. – TomTom Jul 24 '18 at 19:52
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    @TomTom Are you saying no one should enter a mortgage contract except a full-term fixed mortgage (not widely available outside the US)? – Grade 'Eh' Bacon Jul 24 '18 at 20:02
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    @TomTom If our aim is to buy a house I'm unsure why the best advice is to not to take any of them, at the moment we are just ploughing money into rent. Your point about interest rates rising, would that indicate the fixed for 5 years would be preferable? I would say our joint projected income should rise gradually. – Fiona Jul 24 '18 at 20:02
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    No, i mean you have to be prepared for interest rate to get up significantly in the next 5 - 10 year cycle. What good is buying a house if you can not afford that. YOu talk about the fixed 2 years - can you handle what comes after? Otherwise that is a fire sale coming. Btw., full term fixed.... got one of those over 20 years in germany, they are STANDARD here. But no, this is not about fixes - it is about you assiming yo ucan refinance lower when in reality we are at the bottom of a cycle. – TomTom Jul 24 '18 at 20:07
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    Check the graph at propertyinvestmentproject.co.uk/property-statistics/… - This is not "it goes lower". And then research sub prime crises (US) for exactly the situation you enter in. The problem is not 2 or5 years - it is what you do in 7 years. If you CAN afford that - go for it, but if not - beware about that. – TomTom Jul 24 '18 at 20:08
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If you think you can make the payments comfortably, even if interest rates rise (and they probably will), then over a 20 year mortgage you will pay a lot less interest. If you're not sure, then take a 30 year one, and make overpayments whenever you can.

A 5-year fix gives you more certainty than you get from a 2-year one if interest rates are going to rise, if that's something that concerns you.

On the other hand, if you go for a 2 year fix, then you get the opportunity to make a large overpayment every 2 years. Just let the fix run out (so the 10% cap doesn't apply any more), make a lump sum payment, then contact the lender for another 2 year fix.

It really depends on whether you expect to make overpayments, or if you just want to pay the mortgage every month with as much certainty as possible.

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    Going for the 30-year mortgage, but making payments as for the 20-year, ends up with the same interest payments, but with significantly increased flexibility. – Martin Bonner Jul 27 '18 at 10:42
  • It is very unlikely that first-time buyers are going to be able to overpay more than 10% per year. If they could, they should probably wait six months and accumulate another 5% deposit (they will get a significantly better rate at 90% LTV). Even if they can, by the end of five years they will have paid off half the mortgage. – Martin Bonner Jul 27 '18 at 10:44
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My Advice:

I would absolutely opt for the 2Y fixed, 30Y mortgage for the following reasons:

  • The 30Y deal has lower contractual payments with a free option to overpay and permit greater capital repayments equivalent to the 20Y. It is unlikely you will exceed the 10% per year overpayment cap so this becomes effectively redundant.
  • At the end of 2Y if the BoE hasn't hiked more than to around 1% (which is the current market forecast and already priced into those mortgage offers) then future mortgage rates are likely to be similar values to what you can currently achieve with the current 5Y fixed. However, you should be able to renegotiate a better rate at that point with lower LTV, without penalty. This is nice scenario to be in than having to wait a further 3Y for the fixed period to expire.

However, note that you should absolutely pay off as much capital as you can afford. There is no point cash sitting in your account when it could be reducing a 3.6% interest and working toward securing you better rates at the end of 2Y.

Additionally, from a risk management perspective you are comfortable with the payments then even if this did work out poorly and rates did rise unexpectedly higher than 1% in 2Y, since you are on the 30Y with lower payments you will be capable of weathering the storm.

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For mortgages, I would always go for a full term fixed rate one. Sure, they are more expensive, but if the rates go down, you can refinance the mortgage at the lower rate, and if the rates go up, you will be safe. As long as there is inflation, and you can manage to get income increases in line with the inflation, a fixed repayment will end up getting lighter and lighter on your budget.

As for the run time of the mortgage, you should take the shortest run time you can afford. This will lessen the total interest you need to pay, and you will end paying back the principal sooner, and thus you will up own more of the house yourself in a shorter time. This is useful when selling it later.

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    Full term fixed rate mortgages are common in America but very very rare in the UK. They also often have restrictions that may prevent refinancing if rates go down. – Robert Longson Jul 25 '18 at 6:44
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    Agree @RobertLongson. Nationwide offered one in 2007 but it was for around 6.5% and had an early repayment charge (which you'd have to pay if you switched) across the full 25 years! Thus when interest rates crashed within a couple of years, everyone who'd taken that out was in a pretty bad place... – AakashM Jul 25 '18 at 7:52
  • Thoroughly disagree with this suggestion – would do pretty much the opposite! Suspect that this answer makes some assumptions that may not be valid in UK. Perhaps declare assumptions to improve answer? – marktristan Jul 25 '18 at 8:35
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    My assumption is that full term fixed rate are available and not overly restrictive, with only a limited repayment charge on refinancing. In my country, Belgium, that is the case. – Björn De Meyer Jul 25 '18 at 8:51
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    Well, I didn't know all that, but I'd say the mortgage situation in the UK is pretty awful. Maybe I should move my answer to another similar question outside of the UK. – Björn De Meyer Jul 30 '18 at 5:34

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