Reader Question:
Hi Dean,
We are unsure whether a 2 or 5yr fix would be best. We are buying a house on a 90% Loan to Value (LTV), the value of property is £170,000 as it is now, however, it is a project and requires a lot of work so when we have got it nice it may be worth at least £210,000, based on other houses in the area. So we wonder whether a 2yr fix would be better than a 5yr fix due to the fact that in 2yrs we should have a lower LTV (ie 75% for which we can possibly remortgage at a lower rate)? As the Bank of England Base rate is now predicted to increase around 2017 would a 5yr fix be a bad idea as it would end when rates will potentially go up?!
Dean's response:
As you have probably noticed, the products available at 90% LTV are quite limited, you would certainly be paying significantly less at 75% (potentially almost half the rate currently!), but there are a number of unknown factors and for me to give specific advice. I would recommend you speak to a mortgage advisor who will speak with you to understand your exact situation and plans – this is free service with whole of market advice at a time to suit you -. However, generically I can give you a few pointers that will hopefully help initially.
1. Try to find out what similar properties have actually sold for in the area before you invest (rather than what agents advertise them for), www.nethouseprices.com takes it’s data directly from the land registry and is totally free.
2. Nobody knows what rates will look like in 2 or 5 years time. Bear in mind that any rate taken in the future is subject not only to market rates at that time but also what’s known as ‘swap rates’ which are based on market analysis of might happen over the fixed term you are choosing, so even a ‘good’ 75% LTV rate in 2 years time may not be as good as 90% is now and you will likely have to pay another fee or even fees to set it up, which can run into thousands of pounds.
3. There are numerous pundits and experts who ‘predict’ interest rates, it is not wise for a professional adviser to get drawn into this or a buyer to be heavily influenced by these as they change all the time. Loosely, the majority of those close to the industry expect little change in rates prior to the next general election in June 2015, at the moment some believe there will be modest increases (say between 0.25% & 1%) before this, although some believe the recovery in the economy is so fragile that we could even see a small cut down to 0.25% this year – this is based on analysing speeches and rhetoric from The Governor of The Bank of England (by no means an exact science, but probably the most reliable source). Again the majority expect the base rate to start rising more steadily after the general election, but again nobody has a crystal ball and this would be dependent on a significant recovery in the economy.
4. Consider a tracker for 2 years?...but no longer. These can be lower than the 2 year fixes and with predictions as they are, will likely save you money. However any adviser would need to know that you can manage moderate rate rises should they occur.
5. Bear in mind many lenders have cut rates in the past couple of rates as the authorities put pressure on them to lend more at higher LTV’s...don’t expect these to hang around for long, as soon as lenders hit their targets, they will pull the rates at short notice (often within hours) and replace them with higher one’s.
6. Don’t take ‘discounted’ rates or anything tied to an individual lenders ‘standard variable rate’ (SVR), these are very different to trackers even though on the face of it they look the same, but lenders can put these up when they want to and some have already put their ‘SVR’s’ this year.
7. Try not to get pressurised into getting an ‘Agreement In Principle’ or ‘Mortgage Certificate’ or similar by the agent. These are credit scores and if you get more than two done within a month, it could affect your credit rating and stop you moving completely. Only do once you are totally sure this is the place for you and do it through the lender you choose directly or through the broker of your choice, you do not have to use the agent’s adviser.
8. Finally, do take advice from a Whole of Market broker who receives their income from the lender, not by charging you a fee. The current market is very complex (especially at 90%) and all lenders have hidden rules & policies relating to what they lend on or who they lend to (sometimes different from their standard at 90%) you will not find out about on a search engine or until you've potentially wasted an hour or so in their branch. A good adviser will do all the legwork and paperwork for you and will save you having to go through call centres to progress your move.
I hope this helps.
Best Regards
Dean Mason - Cemap, Cert PFS.
Practice Principal
Masons Financial Planning
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