On the clock: Remember time passes quickly when you are thinking about how long to fix your mortgage for.
Britain is a nation addicted to short-term mortgage thinking.
Even at a time when we are stretching our finances further to afford a home, moving less, and pushing the life of our mortgages beyond 30 years, we still remain captivated by two-year fixed rate deals.
Five-year fixed rates at under 3 per cent – or even 2 per cent – offer both historically cheap money and the chance to take out a product that gives you some financial security.
And yet, a two-year fix is cheaper.
So, when the mortgage industry tempts people in with these teasers they don’t need much convincing.
The prospect of saving money short-term is a powerful draw compared to thinking more about the long-term and how our lives pan out.
We also seem to forget quite how quickly two years passes.
One of the comments I regularly get from people is that while they read an expert in one of our stories talking about why five-year fixes are good – and thought they agreed with the sentiment – the broker they used said to take a two-year fix and tried to talk them round.
This is not necessarily bad advice, but you have to question why it has been offered.
Is the broker recommending a two-year fix because it’s really the best option for you? Or is it because they want your business and commission again in two years’ time when it’s time to remortgage?
How long you fix your mortgage for is a personal decision, entirely dependent on your circumstances.
A good broker will help you ask the right questions of yourself to make that decision. Unfortunately, too often I think the wrong questions get asked:
- How much will I save each month?
- Will interest rates still be low in two years?
The first needs weighing up carefully against the extra fees incurred by repeated remortgaging.
The latter can deliver no more than a best guess answer, which needs a careful explanation of the potential for banks to go cold on lending or house prices to fall. Both of which could send mortgage rates up or make loans much tougher to get, independent of what the Bank of England does.
There is also a concern that too many people currently have their thinking coloured by those with buyer's remorse from taking out a five-year fix after the financial crisis.
Mortgage rates have tumbled in recent years and those locked into higher-rate long-term deals will have looked on enviously, but they should beware allowing that to overly influence their thinking now.
The question should be how much further can mortgage rates realistically fall from here?
Got a baby in a small flat, chances are that you might want to move soon and so a five-year fix won't work as well. If you're moving to a four-bedroom home, you might be there a while.
A good broker will get you to make a decision based not just on what looks like a temptingly super-low rate, but on how you expect your life to run over the time period.
If you are buying a property it is highly unlikely that you will move in two years, but if you are remortgaging and have a growing family, or move regularly for work, then you very well may do.
People should ask themselves questions about their lives:
How long will I live here before I move?
(Most people underestimate this and people are spending longer in properties, but whether you are a first-time buyer, or mover buying a long-term home, makes a big difference here.)
Will we have children that would mean we need more space?
(A freshly-married couple in their thirties, who would like to have kids and buy a one-bedroom flat might find they outgrow it quickly).
Am I thinking about going self-employed?
(Working for yourself seriously crimps your mortgage prospects, you don’t want to be remortgaging a two-year fix in your first year of self-employment)
Do I really want to bother going through this whole rigmarole again in two short years?
(At the end of the day, most people are not interested in interest rates, inflation, the economy or all the other elements of the guessing game. They find the mortgage process tiresome and may let remortgaging slide, is a two-year fix wise for them?)
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That above list is not exhaustive, but it’s an idea of what I think borrowers should be considering.
And things such as this should carry as much weight as saving bit of money each month.
This is because people should also question why mortgage lenders like two-year fixes so much too.
Lenders would argue it is because of customer demand and flexibility.
Alternatively, it could be that teaser rates are a nice little earner, because human nature and behavioural economics tell us that enough people don’t remortgage at the end and instead land on a more expensive standard variable rate.
A few months of that can easily eat up any savings made over a five-year fixed rate mortgage.
Banks love short-term deals because customer inertia is highly profitable.
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