What Is The Point Of...

[D'artagnan]

Maybe I am missing something, but what exactly is the point of 2-year fixed mortgages? At least if you're on some kind of tracker, you can gradually get used to increased repayments. On a 2-year fixed, interest rates can easily rise by 100bp. Sure, if you're going to fix for 10, 15, even 25 years, there appears to be a point in that your wages may significantly increase in that period which will mitigate the risk of higher repayments in the future, but 2 years is nothing!!!

Is there any reason why such short-term fixed rates are a good idea??? Why have most people gone for the 2 year ones when they could just as easily have fixed for 5 or 10 years?

[OzzMosiz]

Maybe I am missing something, but what exactly is the point of 2-year fixed mortgages? At least if you're on some kind of tracker, you can gradually get used to increased repayments. On a 2-year fixed, interest rates can easily rise by 100bp. Sure, if you're going to fix for 10, 15, even 25 years, there appears to be a point in that your wages may significantly increase in that period which will mitigate the risk of higher repayments in the future, but 2 years is nothing!!!

Is there any reason why such short-term fixed rates are a good idea??? Why have most people gone for the 2 year ones when they could just as easily have fixed for 5 or 10 years?

Possibly a couple of reasons why.

1) Rates may come down (when rates were under 4% you would've been foolish not to fix for a long period)

2) IF rates did come down, and borrowers want to take advantage by switching mortgage, if they are fixed into a 10 year contract they usually have to pay a redemption penalty.

[R K]

Beats me! Unless it suits flippers.

I assume it is actually good for the lender more than the punter.

[Conan]

They've become popular over the last decade (in a rapidly rising market) to extract equity through re-mortgage.

[Gremlin]

So you can live in a house you can't really afford for two years, remortgage it to buy a plasma and some crap flatpack furniture and then get turfed out on the street, bankrupt, when your credit dries up.

Or so you can gamble with your financial stability.

The list of silly cynical answers can go on and I can't actually think of a viable sensible answer for a person buying a property to house their family.

[dog]

Maybe I am missing something, but what exactly is the point of 2-year fixed mortgages? At least if you're on some kind of tracker, you can gradually get used to increased repayments. On a 2-year fixed, interest rates can easily rise by 100bp. Sure, if you're going to fix for 10, 15, even 25 years, there appears to be a point in that your wages may significantly increase in that period which will mitigate the risk of higher repayments in the future, but 2 years is nothing!!!

Is there any reason why such short-term fixed rates are a good idea??? Why have most people gone for the 2 year ones when they could just as easily have fixed for 5 or 10 years?

Two year mortgages are not long enough to pay back any serious capital and the borrowers face the risk that interest rate trends could turn sour in the interin. Its something of a poison chalice.

From the lenders perspective, a 2 year fixed rate is good bait for getting customers on the hook. If a customer happens to miss a payment or get a CCJ in the mean time, the hook becomes well and buried.

[nohpc]

The shorter the term of the fix the lower the rate. By fixing for 2 years you are gambling on future rates holding or dropping so you can get a lower rate. 2 year fixed rates give a lot of flexibility (ie you are not tied in for 10 years).

My preference these days now that I have paid off a lot of equity is for a tracker mortgage as I am gambling on future rates being lower but can afford it without pain if they go the other way.

[killerbee]

I choose a 2 year fix in September 2005 because I anticipated rates would rise, also my income was about drop by 40% for about 2 years and I would not be able to make overpayments for this period. Glad I did after all the hikes.

Kb

Edited September 28, 2007 by killerbee

[nohpc]

I choose a 2 year fix in September 2005 because I anticipated rates would rise, also my income was about drop by 40% for about 2 years and I would not be able to make overpayments for this period. Glad I did after all the hikes.

Kb

Unfortunately I took out a tracker but it was hugely discounted so don't mind so much but still would have been better off fixing. C'est la vie

[dog]

The shorter the term of the fix the lower the rate. By fixing for 2 years you are gambling on future rates holding or dropping so you can get a lower rate. 2 year fixed rates give a lot of flexibility (ie you are not tied in for 10 years).

My preference these days now that I have paid off a lot of equity is for a tracker mortgage as I am gambling on future rates being lower but can afford it without pain if they go the other way.

You are quite right, people are gambling. Two years ago people were happily gambling on short term loans. 'They couldn't lose'. Interest rates were bound to go down again within 2 years. If newspaper reports are true many of those people now face defaulting on their loans.

[dog]

I choose a 2 year fix in September 2005 because I anticipated rates would rise, also my income was about drop by 40% for about 2 years and I would not be able to make overpayments for this period. Glad I did after all the hikes.

Kb

Yup! That makes absolutely no sense at all.

[A.steve]

Is there any reason why such short-term fixed rates are a good idea??? Why have most people gone for the 2 year ones when they could just as easily have fixed for 5 or 10 years?

When I bought in '98 I took out a 3-year tracker. (It was pushed heavily, and I imagine *many* people would be swayed into this because they felt their "mortgage advisor" was giving them good advice.) I knew mine was dishonest... for a number of reasons... and that he had *absolutely* no understanding of my financial position in spite of my being entirely open, honest and truthful.

The 3-year tracker was perfect for me because I knew my income, while minimal for the next 2 years, would exceed the costs of servicing the debt. I expected my income to rise dramatically after 2 years (which it did) - to the extent that I would have been able to make big over-payments even at 20% interest. I sold after 4 years because other commitments took me out of the area... and I've rented since.

I paid about 10% more than people on variable rates during the fix - but I slept easily.

Edited September 28, 2007 by A.steve

[VeryMeanReversion]

Maybe I am missing something, but what exactly is the point of 2-year fixed mortgages?

The point is that it is yet another product sold using fear (of interest rate rises) to generate arrangement fees.

Unless interest rates a very voltatile, its not much better than a 1-month fixed i.e. variable.

VMR.

[killerbee]

Yup! That makes absolutely no sense at all.

If I couldn't make substantial overpayments why would I stay on SVR, better to go for a fix during my period of low income, I could still make over payments up to £500.

Does this not make sense? If not, why not? I'm ready to be educated.

kb

[A.steve]

If I couldn't make substantial overpayments why would I stay on SVR, better to go for a fix during my period of low income, I could still make over payments up to £500.

Does this not make sense? If not, why not? I'm ready to be educated.

The question of provision for overpayment or offsetting is independent of fixing an interest rate... in principle, at least.

The advantage of a fix is that it allows you to plan your finances better - i.e. you need less liquidity... you can spend more of your "emergency" savings that you would need to keep in reserve if you had the unpredictability of a variable rate.

When I looked at getting a mortgage again in 2004, I wanted a fixed rate and offsetting. This would mean I could use my savings to minimise the extent of my debt, but also be able to accurately identify how long my savings would last in the context of a hiatus in my income stream. I considered it worth a considerable premium to do this - it has tax implications too.

A fixed rate reduces the volatility of your position (i.e. the inherent risk in your debt) for the duration of the fix... but this costs money... it is a bit like insurance. One should also remember that the effectiveness of the fix diminishes over time... so, while a fix for 2 years offers a fair degree of risk reduction at the outset, 22 months later it offers far less protection from risks. Of course, people can also gamble... but I doubt the man in the street is better able to predict interest rate rises than the professionals who price interest rate swaps and retail fix rates... the punter will loose by doing this in the long run.

I don't have any insurance (except car insurance) - so, if I get robbed, I loose what gets stolen. In 5 years I've not been robbed - and that has saved me, say, £1000... I've been confident to do this because I've been able to afford to replace anything which might get stolen from savings... I've things of sentimental value, but nothing of significant worth to someone else... and an insurance payout wouldn't resolve the loss of something for which I've sentimental attachment. Having insurance won't stop me getting robbed... if anything it might even increase the risk slightly... in a similar way to fixed rates, I've looked at my personal circumstance and sentiment... and chosen a strategy to suit.

A fixed rate costs more because the risk must be hedged (by any responsible lender.) This is done on the derivatives market... where underwriters demand payment up-front to accept the risk of an increase in costs arising from changes in interest rates. This is a bit like where Lloyds of London underwrite the launching of ships... a bunch of toffs hand over the title deeds for their estates and then the ship launches.... if it doesn't sink the toffs drink champagne, eat caviar and don't need to work all year - then get handed back their title deeds. If it sinks they loose their estate and queue up at a soup kitchen. In the context of interest rate swaps, a "margin" must be deposited to ensure that funds are available to pay-out for the immediate future... and there are "margin calls" when losses are made or everyone accepts that losses are imminent. Not everyone needs to deposit the same margin... So, for example, if a no-one like me wanted to underwrite a £1m interest rate swap, I'd probably need to deposit £200K as a margin (if it were possible at all for me to be taken seriously)... because, in the worst case scenario, I'd not be seen as sufficiently reliable a guarantor. A multinational corporation (say BP or Maccie-D) would need a far smaller margin - and a bank would only need the tiniest margin imaginable... and a government can do it with no greater margin than the hot air of government ministers... since they can print money if necessary. This is one of the reasons "Tier 1" banks have been so amazingly profitable - especially recently.

A reduction in interest rates is like a big state hand out to the wealthy & banks & those who issue interest rate swaps to hedge fixes - an interest rate rise... the converse. This is why "the city" wants an interest rate drop...

[RichB]

I didn't see anyone mention it, but typically over the first couple of years you pay back a minimal amount of capital. If you go for 10 years flipping every 2 years, you will probably still owe pretty much what you started with. If you stuck with a single mortgage for that period you would have made a pretty good dent in it.

[youthoftoday]

I didn't see anyone mention it, but typically over the first couple of years you pay back a minimal amount of capital. If you go for 10 years flipping every 2 years, you will probably still owe pretty much what you started with.

Only if you remortgage for the same term each time.

Edited September 28, 2007 by youthoftoday

[bearbullfence]

Maybe I am missing something, but what exactly is the point of 2-year fixed mortgages? At least if you're on some kind of tracker, you can gradually get used to increased repayments. On a 2-year fixed, interest rates can easily rise by 100bp. Sure, if you're going to fix for 10, 15, even 25 years, there appears to be a point in that your wages may significantly increase in that period which will mitigate the risk of higher repayments in the future, but 2 years is nothing!!!

Is there any reason why such short-term fixed rates are a good idea??? Why have most people gone for the 2 year ones when they could just as easily have fixed for 5 or 10 years?

Rather than the poor uneducated guesses above, let me explain the very simple reasons I went for a two year fixed.

1) I thought IR would rise, and they have my fixed rate looks like a complete steal at today's rates.

2) The two year fixed rate was a better rate than 3, 5, 10 etc.

3) I thought I would need to move in less than three years and I didn't want to pay the penalty fee for moving within the fixed period.

To ensure affordability I reduced the term of the mortgage to increase monthly payments. If it is too much of a sting to maintain the term when I remortgage I'll just push the term out.

[Bloo Loo]

I think most people go with the two year fix cos its cheapest at the start-they are sold to them on the basis- "yeah, its tight now, but your income will go up in two years"-("wont it mr customer- or are you a total failure?") "and in any case, interest rates are always low and if worse comes to worse, you can always sell in two years and take your capital gains." Plus its a big hook to catch the macarel- people re lazy and Banks rely on their inertia, both in mortgages and savings

[madasafrog]

But many people put the remortgaging fees (up to a couple of thousand pounds) back on the mortgage, so they tend to wipe out pretty much all of the equity they had paid off.

It's an industry con, that suits the Ray Boulger's of this world perfectly. The big problem is that Joe Public actually think it's a great deal too.

Why people don't just settle for a portable 25 year base rate tracker of about 0.2% above base rate is beyond me (assuming they can afford it of course!).

It may be the case now. I had a look at the fixed rates out there and due to arrangement fees, they are no longer such a good deal. I am on a fixed at present and based on todays figures I will move to tracker when it finishes. It will then give the flexibility to grab a good fixed rate if the BoE panics and drops IR.

[bearbullfence]

Two year mortgages are not long enough to pay back any serious capital and the borrowers face the risk that interest rate trends could turn sour in the interin. Its something of a poison chalice.

Serious capital? What's your definition of that? When my 2 year fixed expires I will have paid back just under £15k off the capital. That is serious to me. Having run through the figures if I'd have gone with a tracker due to the increases I would have paid off between £13.5 and £14k. That £1k is better in my pocket than the banks.

[Benedict]

I went for a roughly 2 year fix back in May this year at 5.3%, I was expecting interest rates to climb through the rest of 2007 and most of 2008 but come back down by the point at which I'd be remortgaging. So it seemed like a good idea, protect myself against short term adverse interest rate developments, but leave myself free to lock into a good long term fix in a couple of years when I'm hoping those rates will be more favourable.

Plus the income multiple in a couple of years is going to be quite a bit lower so I'm hoping the mortgage will be a lot better. LTV hopefully at least won't be any worse, compared to what other properties in my peer group are going for I seemed to get a ridiculously good price so even if market prices turn the market price should still compare favourably with my purchase price.

It's all a gamble anyway, so far it's worked out well with the way rates have moved but until I've remortgaged in a couple of years I won't know whether I called it right or not.

[Bloo Loo]

Serious capital? What's your definition of that? When my 2 year fixed expires I will have paid back just under £15k off the capital. That is serious to me. Having run through the figures if I'd have gone with a tracker due to the increases I would have paid off between £13.5 and £14k. That £1k is better in my pocket than the banks.

Is that what you THINK? or is that what you have checked with the Mortgage CO- I am amazed at how many people THINK theyve paid off loads, but they are paying mainly interest in the first few years.

[madasafrog]

The big downer is if you decide to move during the fixed period you do get hit with a redemption fee which can negate any savings you may have made by fixing the rate.

I am in that situation at the moment. We are thinking of moving house and if we moved now, we would be hit by a 2% penalty. We are now taking our time a bit so that by the time we do look to move, the fixed rate will have finished. Plus the market conditions will hopefully become a bit clearer.

[hourkid]

Is that what you THINK? or is that what you have checked with the Mortgage CO- I am amazed at how many people THINK theyve paid off loads, but they are paying mainly interest in the first few years.

To have paid back £15k in two years, and assuming a 5.5% fix back in 2005 (and further assuming that's when you bought your place), your mortgage must have been circa. £380k. You'll also have paid £41k interest. Woooeee!!!!!!!!!!