UKC

Wondering what mortgage product to change to, and considering the question of interest rate rises. What do financial bods think on here? Are the BoE more concerned with deflation and maintaining the economic recovery than anything else, or are they shifting in favour of controlling house market inflation and giving savers a better deal? What about the longer term forecast, are rates likely to rise fast or slow when they do, and where are they likely to end up.I don't know a great deal about mortgages, but am wondering whether to go for a 2yr fixed at 2% (subsequent 3.99%) through to 5yr fixed at 3.5% (subsequent 4.00%). Both would represent an improvement, but the 5yr only a very marginal one. Any advice on the ins and out would be greatly appreciated!

In reply to contrariousjim:

Caveat: I am not an IFA but I do take an interest in these things.

Mark Carney said quite recently that he expected that when rates do rise they will probably settle at a level of about 2.5% in the medium term. Since he's in charge of setting the rates he is probably worth listening:

http://www.bbc.co.uk/news/business-28053045

I would see a mortgage as a medium term investment as you can always change in the future once your fixed period is over.

Are the 2 products you quote in the OP your only options? You should be able to do better than that over the next 2/3 years but I am assuming that you have a high LTV of those are the rates you've been offered?

Personally I wouldn't even consider fixing for 5 years, much less at 3.5%. Much better to fix for 3 years in case circumstances / general economic situation change.

Your best bet for a good deal would be to speak to a mortgage broker. Also have a look directly at places like first direct as they don't go through brokers and are decent products.

In reply to contrariousjim:

http://www.bbc.co.uk/news/business-28245709

A lot of good information in this BBC article.

Rates are incredibly low and it's a one way bet they will rise the question just being when. There is plenty of conflicting data to suggest that could be as soon as this year or perhaps later in 2015.

Take into account the arrangement fee, overpayment charges and exit fee as these can make difference in the overall cost within the period to intend to maintain the mortgage.

In reply to contrariousjim:

ok, my take on it is not mainstream and could well be completely wrong but here goes...

Interest rates are going nowhere anytime soon. We may see a token 25bps hike in the next 12-18 months but otherwise nothing. The BoE are trying covertly to manage rampant house prices by releasing "forward guidance" (where the parameters change when they suddenly look like falling into place too soon) , new affordability tests, mortgage down valuations by surveyors and the fact that most mortgage rates are at a significant premium to base rates.

And if I really want to don my tin foil hat, I will point you towards the recent removal of many tracker mortgages by some of the big lenders. i'm sure there are many good reasons why these have been pulled, but its absolutely nothing to do with them in the know, as it were, having a very good idea that base rates are going nowhere for the foreseeable future.

Apart from all of that, as a country we are so heavily in debt that we really need some inflation to help and raising rates is not on that agenda.

But all of this is just my opinion and not worth much at all. TBH, most mortgages are much of a muchness, tbe ones with slightly lower rates have large arrangement fees and vice versa, some have free valuations...some don't, some come with building insurance...some don't...but when you factor it all in, I suspect you can't get a fag paper between them

In reply to Bjartur i Sumarhus:

I would disagree, sorry, and as I work in FS I do have some knowledge.

Personally I think we could probably see a modest rise over the next 12 months, probably up to 1.5-1.75%. Personally I think it will exceed Carey's 2.5% in time - say 2-3 years hence - the BOE base rate has been averaging 5% for the last 400 years or so and that's a lot of history to push against.

Things I am certain about.

The BOE cares naff all about savers, and even less about a house price boom. To be honest it cares naff all about consumers, as frankly that's not its remit.

What it does care about is the capitalisation of the banks. Basel III is just around the corner which will force banks to hold a lot more money as cash. How that translates into BOE policy is another thing - there's views in both directions.

In reply to John_Hat:






Hmm.. I've read articles today from a number of different sources saying that the long term, 10yr forecast aim is for about 5%, obviously highly speculative, but that would make your 1.5% rise over the next year pretty acute. Also, I've read a number of articles saying, though it is hard for savers, the arguments and rationale given for desired increases in BoE interest rates are constantly changing, even though the nature of the demand is not.

In reply to all:

Thanks for all the input. I think that I've shifted a bit from my usual conservative position of going for a long term fixed. I'm looking at the other end of the spectrum at a 2yr fixed, £1k arrangement, at 1.89% (subsequent 4.0%), seems to be a reasonable bet. The 3yrs seem much more equivocal in their potential advantage over longer fixed.

In reply to contrariousjim:

Will you actually save yourself £1k in interest repayment over two years in comparison to your current rate?

I've recently converted to an offset mortgage at 2.29% above base (lifetime tracker). The arrangement fee was £499. I could have had 2.59% for free, but if I keep the mortgage for 40 months I'll be at break even. ie it takes 40 months to claw back that £499.

The offset is great though, all of your money in all your accounts offsets your capital and reduces your interest allowing you to effectively overpay. I 'saved' £35 (which I thin used to overpay) in the first month alone.

In reply to hokkyokusei:

Offset is the product we've been on. We've been sting really by it and should have moved sooner. We have also had T&Cs creep. We started on about 4.75 for both (2008). RBS only passed on 0.5% of reductions in BoE base rate, but all of the reduction on our offset savings account. Then also changed the way we were allowed to use the account, which initially allowed us to pay wages directly into it, and bill direct debit payments straight out of it allowing to maximise our time and quantity of money on which we could earn interest. They removed that facility, cancelled our direct debits, didn't tell us incurring us charges, and refused to allow us to set up standing orders between our current account to achieve the same effect. Bastards.

You're right though, I probably should look at offset products on offer.

In reply to contrariousjim:

I'm with first direct, I have two current accounts (bills & spending) plus a savings account offset against the mortgage account. They just add up the debt/credit in all the accounts before calculating the interest. I only switched a couple of months ago and I'm kicking myself that I didn't do it years ago.

In reply to contrariousjim:

Two things are playing on my mind:
- How easy will it be to refinance in a few years time given tighter mortgage application rules?
- what will the shock be to your finances of going from the fixed rate to svr when the fixed term is up?

I believe the boe has only ever been asked to work to inflation but is certainly mindful of the impact of increased interest rates on borrowers.

In reply to hokkyokusei:


Yes that's how we started too:
Mortgage: started on 4.75% went to 4.25% across entire financial crash period
Savings account: started on 4.75%, went down to 0.5% across entire financial crash period
RBS cancelled our direct debits and refused to allow us to use the savings accound to pay bills, which had been allowed, and also refused to allow a regular standing order between current account and savings making us rely on our organisation and giving us more to do, even more difficult because our two most local RBS branches closed down. This was also precipitated by cancellation of our direct debits without warning, incurring charges, which we then had to fight the bank to retrieve. We quickly shifted to direct banking after that to make life easier. I'm sure first direct is better, but just keep an eye on the buggers!

In reply to ByEek:


What rules are these? What do I need to know? Our LTV is less than 50%, with repayment across 18yrs.


Well that's the big question. If long term the BoE is 5%, and meium term 2-3%, what will the banks set their SVR at? I'm hoping that after a 2yr fixed that it will not be a SVR much worse than our current 4.5ish%.

In reply to contrariousjim:

That's just crazy. Sounds like they just didn't want to be doing offset mortgages any more.

In reply to contrariousjim:

I went for 3 year fixed. But I think actual mortgage rates won't change all that much with a rate rise - they've bottomed out at an economic level far before rates ended up as low as they did.

The one thing I wouldn't touch with a bargepole at the moment is any kind of tracker.

Neil

In reply to hokkyokusei:

Offset mortgages (and having your mortgage in the same place as all your savings) is a nasty risk at times of financial turmoil, as if the FSCS has to pay out if the bank fails, it pays out on your *net* money in that bank. So all your savings would involuntarily go into your mortgage.

Neil

In reply to contrariousjim:


The new mortgage lending affordability rules came into force this April.
http://www.cml.org.uk/cml/filegrab/?ref=8941

It was noticeably harder for me to remortgage this year than get a mortage a couple of years ago. They were particularly harsh with me. Apparently because I own more than 10% of the company I work for my salary is not enough to go on. I could "somehow" have manipulated that figure to an artificially hight level. So not only did I have to provide bank statements, payslips etc, I had to provide company accounts (for the four companies in our group) for four years, four years tax returns, and a letter from my accountant explaining the accounts in simple words (because bank's credit approvals department couldn't understand the accounts). They also didn't really want to lend me more than the remortgage amount, despite having 65% LTV, and wanted lots of rationale about what I was going to do with the extra money (I owed to to my Dad). It was also complicated by the fact that I have a mortgage on another house, where my ex lives and so they wanted details of all the incomings and outgoings of that house! Why?! I'm paying the mortgage not her! It was all sorted out eventually, but it did take several months. Banks. Urgh!

In reply to contrariousjim:
I'd go for a 2 year deal (fixed or tracker). Long term fixes tend to be priced so the odds are in the lenders favour (like on the gg's). You could come up trumps but then the market seems to be very competitive on new short term deals(especially if you have good equity?).

You've got to be careful at thinking the rates reflect the market.

At the moment, the short term rate is reasonably predictable based on the rhetoric from the BoE. The 5 year forecast is less predictable, and will include the effect of the new government. So the 5 year rates are probably more affected by the risk than the certainty of a rise.

What you have to work out is not what is best now, but what will happen in 2 years when a 2 year deal ends. The mistake is to think the 5 year price represents what you would pay in 5 years time, and to think that on a 2 year deal you'll get the 5 year rate in 2 years time.

If you're capable of doing the maths, and it only need a spreadsheet and the most basic use of logarithms, you can work out what 3 year fixed rate you would need to secure in 2 years such that the total cost over 5 years is equivalent to the 5 year price. Then you need to see how that compares to now.

Also to consider is you LTV ratio. If you are above 75% now, will you cross any multiple of 5% in 2 years? If you will then potentially you'll be able to get a better deal.

In reply to contrariousjim:



They are the new affordability stress tests that banks must apply to your current and future finances. It is all rollocks but could prevent you getting a new deal ltv or not. If the bank deems that couldn't take a 3% interest rate rise then computer will say no.