The Lemon Fool

A friend of mine has been offered a mortgage by Halifax with two fixed term options:

1.4% Fixed for 2 Years

1.7% Fixed for 5 Years

The decision depends on how much mortgage borrowing interest rates might increase by.

Which option would you say is best?

Thank you.

Investor wrote:A friend of mine has been offered a mortgage by Halifax with two fixed term options:

1.4% Fixed for 2 Years

1.7% Fixed for 5 Years

The decision depends on how much mortgage borrowing interest rates might increase by.

Which option would you say is best?

Thank you.

What are the costs for early termination? What are the arrangement fees? What is the size of the loan (and LTV)?

It depends on his/her appetite for risk and spare income.

I'd go for the longer one as I can only see rates rising in the short to medium term.

As one who has paid 15% interest on a mortgage in the past, I'd be tempted by a mortgage I saw offered recently. 40 years fixed at 2.85% or thereabouts. Portable and to a degree flexible, with no penalty for early redemption, I'd have jumped at the chance of something similar if it had been available when I was in the market for a mortgage.

https://inews.co.uk/inews-lifestyle/mon ... st-1314986

Thanks for the guidance. Very helpful indeed.

Any other thoughts in terms of the two options available?

p.s. the 40 year one does look appetising!

5 years fixed. We are already getting BOE rate rise predictions, and certainly is good. 1.7% is also very low!

JohnB wrote:5 years fixed. We are already getting BOE rate rise predictions, and certainly is good. 1.7% is also very low!

Agreed. 5 yrs at 1.7% - sweet. Sleep easy.

Investor wrote:1.4% Fixed for 2 Years

1.7% Fixed for 5 Years

The decision depends on how much mortgage borrowing interest rates might increase by.

How much might interest rates increase by? As current inflation rates are around 5%, if I remember the headlines correctly, it's well within the bounds of possibility that interest rates could go to 5% within 5 years. It currently seems unlikely that they'd go much higher, but <cliché>expect the unexpected</cliché>.

How much might interest rates drop from where they currently are? Not much at all. The rates are already extraordinarily low (negative in real terms), so there is little likelihood that rates will drop and, even if they did, it would be a very small drop.

On the balance of risks I would say that the 5 year fix is the obvious choice.

staffordian wrote:It depends on his/her appetite for risk and spare income.

I'd go for the longer one as I can only see rates rising in the short to medium term.

As one who has paid 15% interest on a mortgage in the past, I'd be tempted by a mortgage I saw offered recently. 40 years fixed at 2.85% or thereabouts. Portable and to a degree flexible, with no penalty for early redemption, I'd have jumped at the chance of something similar if it had been available when I was in the market for a mortgage.

https://inews.co.uk/inews-lifestyle/mon ... st-1314986

Yes I have never understood this love affair that British people seem to have with adjustable and low-duration mortgages. In the US 15 and 30 year fixed mortgages are the standard. It really is a free lunch since if rates go down you can refinance them, but if they go up then you hold them to term.

Like you I had a mortgage in the 1990s that was 15%. Fortunately it rapidly came down in the ensuing years. But if an adjustable mortgage made sense then, surely a fixed makes sense now, for as long as you can fix it.

Lootman wrote:

staffordian wrote:It depends on his/her appetite for risk and spare income.

I'd go for the longer one as I can only see rates rising in the short to medium term.

As one who has paid 15% interest on a mortgage in the past, I'd be tempted by a mortgage I saw offered recently. 40 years fixed at 2.85% or thereabouts. Portable and to a degree flexible, with no penalty for early redemption, I'd have jumped at the chance of something similar if it had been available when I was in the market for a mortgage.

https://inews.co.uk/inews-lifestyle/mon ... st-1314986

Yes I have never understood this love affair that British people seem to have with adjustable and low-duration mortgages. In the US 15 and 30 year fixed mortgages are the standard. It really is a free lunch since if rates go down you can refinance them, but if they go up then you hold them to term.

Like you I had a mortgage in the 1990s that was 15%. Fortunately it rapidly came down in the ensuing years. But if an adjustable mortgage made sense then, surely a fixed makes sense now, for as long as you can fix it.

It's not just demand but also issues with the Supply side. Banks are penalised Capital wise, and the issue of termination costs for long term fixed rate mortgages, which is poorly understood by customers (and authorities and regulators) mitigates against banks offering such products in the UK. Even when the market yield curve was inverted it was difficult to launch attractive long term mortgage product.

In the UK customers expect free-banking and are happy to generally moan about banks and bankers. Few have experienced banking outside of the UK though, and what is considered normal elsewhere. (Your free lunch includes the option premium cost of unwinding that termination hedge in the market - you think customers don't pay this?).

dealtn wrote:

Lootman wrote:Yes I have never understood this love affair that British people seem to have with adjustable and low-duration mortgages. In the US 15 and 30 year fixed mortgages are the standard. It really is a free lunch since if rates go down you can refinance them, but if they go up then you hold them to term.

Like you I had a mortgage in the 1990s that was 15%. Fortunately it rapidly came down in the ensuing years. But if an adjustable mortgage made sense then, surely a fixed makes sense now, for as long as you can fix it.

It's not just demand but also issues with the Supply side. Banks are penalised Capital wise, and the issue of termination costs for long term fixed rate mortgages, which is poorly understood by customers (and authorities and regulators) mitigates against banks offering such products in the UK. Even when the market yield curve was inverted it was difficult to launch attractive long term mortgage product.

In the UK customers expect free-banking and are happy to generally moan about banks and bankers. Few have experienced banking outside of the UK though, and what is considered normal elsewhere. (Your free lunch includes the option premium cost of unwinding that termination hedge in the market - you think customers don't pay this?).

Not sure I understand your comment about "the option premium cost of unwinding that termination hedge", and I trade options!

From what I have seen of long-term fixed mortgages overseas, they can readily be refinanced if rates go down. The "cost" of them is really upfront - the higher interest rate of a long-dated debt over a short-dated debt, at least when the yield curve is not inverted which is normally the case.

Lootman wrote:

dealtn wrote:

Lootman wrote:Yes I have never understood this love affair that British people seem to have with adjustable and low-duration mortgages. In the US 15 and 30 year fixed mortgages are the standard. It really is a free lunch since if rates go down you can refinance them, but if they go up then you hold them to term.

Like you I had a mortgage in the 1990s that was 15%. Fortunately it rapidly came down in the ensuing years. But if an adjustable mortgage made sense then, surely a fixed makes sense now, for as long as you can fix it.

It's not just demand but also issues with the Supply side. Banks are penalised Capital wise, and the issue of termination costs for long term fixed rate mortgages, which is poorly understood by customers (and authorities and regulators) mitigates against banks offering such products in the UK. Even when the market yield curve was inverted it was difficult to launch attractive long term mortgage product.

In the UK customers expect free-banking and are happy to generally moan about banks and bankers. Few have experienced banking outside of the UK though, and what is considered normal elsewhere. (Your free lunch includes the option premium cost of unwinding that termination hedge in the market - you think customers don't pay this?).

Not sure I understand your comment about "the option premium cost of unwinding that termination hedge", and I trade options!

From what I have seen of long-term fixed mortgages overseas, they can readily be refinanced if rates go down. The "cost" of them is really upfront - the higher interest rate of a long-dated debt over a short-dated debt, at least when the yield curve is not inverted which is normally the case.

Take out a 30 year fixed rate deal with zero breakage cost (readily refinanced with no fees embedded in the new product) then you are paying for an American Style option either upfront by premium, or embedded into the quoted rate. The provider of that mortgage (when pricing and implicitly hedging it) is doing the same in the market. If you exercise your option, and refinance, the provider is effectively doing the same to maintain the shape and duration of their hedged book.

You now appear to be acknowledging there is a cost for this readily refinanceable product. Even when yield curves are inverted, the option cost adjusted into the headline rate resulted in higher customer rates for longer duration mortgage product. In the UK this in itself has proved to be unattractive to customers. With a positive yield curve, much more so.