UKC

My Godson called this evening to say that he's buying his first property, a flat. He's been approved for a mortgage but wants advice on should he be fixing and if so for how long etc.

I don't have a mortgage (paid off) so what advice would you give to a 23 year old buying a flat in a good solid area. He's probably going to be living there for a minimum 3 years. If he does move he'd look to rent it rather than sell. He has little in the way of things so needs to be spending money each month on furnishing the place. His salary more than covers the proposed mortgage and living expenses with money to save at the end of the month. Job looks safe but who knows whats going to happen.
Thanks

In reply to Indy:

2 year fix will allow planning for two years and be cheaper than a longer fix.

Interest rates could still be low in two years, so hopefully would not be too expensive to reassess then (remortgage could even be cheaper, higher LTV etc.).

More flexibility to move in 2.5 years without redemption charges. A lot can change in 2 years for a 23 year old.

In reply to Indy:

An interesting question right now. Normally one would say that a 2-3 year fixed would be the place to be for someone in his place, to give security and certainty, but interest rates are so low now they are only going to go one way - up.

a (very) quick search indicates 5 year fixed rates at around 4%. I would be very tempted to go this way if I could ensure the mortgage was both portable and flexible (as in the borrower could make overpayments at any time).

Incidentally, his LTV could potentially affect the advice given. An LTV of 60% (OK, unlikely with a first time buyer) would mean a five year fix at 2.9%. (HSBC). As a first time buyer I would be very interested in this.

In reply to Indy:
As a mortgage free father ( who paid 15% back in my day) now with 3 grown children with , or looking for a mortgage , it is so very different now than it was when I started out.
A big difference is the large deposits they now have to find, and of course the Low interest rates, and the talk only today of them dropping again.

This thread will make interesting reading if enough share their experiences/ expertise.


Edit (low)

In reply to Jim C: I think it's very unlikely that mortgage rates will fall, even if base rate does (other than trackers, which have to) - firstly a lender's cost of funds is affected more by what they have to pay on savings, and that's already about as low as it can go, and also secondly the other factor, in the case of a fixed deal, is the swap rate they can get - which will factor in expected future movements. These have already fallen in expectation of a longer period of low rates - there was an expectation that rates would start to rise in 2015, but that's now receded - I've been a "2016 man" for a couple of years, as I always felt the fundamentals for rapid growth (and therefore inflation) still weren't there, as the effects of government cuts hadn't fed through to real life.

I'd fix as low as you can for as long as you can, assuming you're going to stay in the market - you can always port your deal to a new place.

In reply to Indy:

Contrary to others, I would go tracker on the information given. Rates unlikely to rise much, if at all - read boe statement yesterday (or weds).
Something portable, with no overhang on any introductory deal, that allows overpayment.

Avoid offset. "Fee free" usually more expensive in medium term, so do the maths.

In reply to JJL: Depends on your timeframe though, dunnit? I'm sure I heard you can fix for ten years at sub-3% - if you intend to stay in the market for that long that seems like a pretty safe bet, and avoids any worry about an inflation spike causing an early rise (although as I said, I'm a committed 2016 chap...).

In reply to andy:

For sure it depends on timeframe. And risk. There is a premium for certainty which, on the information given, is needless in this case. If we're crystal ball gazing, I would expect rates still to be very low in 10 years. It will take at least that long for the system to recover, partly because there's a growing acknowledgement that debt-fuelled growth is a flawed model, but nobody has much idea of a better one.

In reply to Indy:

When we were looking as first time buyers the initial rate of a tracker at our LTV was only 1% lower than a 5 year fix. So a lot depends on how much above base he can get a tracker at.

Also depending on property value, arrangement fees can cancel out any savings made on shorter term fixes.

In reply to ebygomm:

I would get a tracker mortgage - some really good deals for two years. But before committing calculate if you could afford a 1% increase in interest rates just in case

In reply to Indy:
for the next couple of years my money (literally) is on the same plan as notaclue above ^^^

In reply to notaclue:

To put the cat amongst the pigeons would a Greek exit of the Euro have significant ramifications for UK interest rates?

In reply to Indy:

I would suggest to fix for 2 years at the lowest rate. We just remortgaged to 1.99% but we could see offers for 1.39% too (but with the amount we were borrowing the additional fee did not make this worthwhile). This will give him enough left over to furnish and to pay into a pension...

In a couple of years time he might be earning considerably more in which case he can fix for longer.