Author Topic: Lower short-term mortgage costs v possible longer term rate rise dilemma!  (Read 2783 times)

scottishstubble

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Hi All

I'm writing from Britain where I know mortgage deals differ slightly from those in North America. However, I'm hoping this question isn't lost in translation....

I am married with a 3 yr old child and one on the way. We recently moved in to a 3 bed, 1150 sqf house which we plan to extend by 350 sqf to make it a long term home (10 yrs +). While we have no other debt than our mortgage, we don't have much savings. We are however adopting a much more mustachian lifestyle and I'm grateful to this forum for the excellent comments given to many of the posts.

We're currently looking to remortgage our home to pay for the majority of the renovations. While this is a big decision in itself, we gave it a lot of thought and are happy with the planned work. It will give a much more efficient living area and, while we are not looking to sell, will certainly add value to the home. Prices are rocketing where we live so are thankful we were able to move last year (we went from a 2 bed flat (condo?) to a 3 bed house less than a mile away yet which cost less). We live near the city centre, are close to lots of amenities, good schools, I have a 20 min cycle to work and we have great public transport.

Anyway, now to the question. In Britain we generally take out mortgages that lasts 2, 3 or 5 years. These can be fixed for the length of that term or linked to the base rate. On a 25 year mortgage, you will have to do this multiple times. Our current mortgage is linked 2% above the base rate (currently 0.5). As in the States, the base rate is at an all time low and will only go up. For the remortgage, this rate is no longer available (booo!). Having scoured the net and spoken to advisers, we could get (I'm using dollars for ease of reference):

a 3 year fix @3.09% for $1,185 a month with a $499 fee; or
or a 5 year fix @3.55% for $1235 with a $999 fee.

Fees vary on mortgages but generally you pay a higher fee for a better % rate. While you generally pay less over the period of the mortgage you should pay the fee upfront lest its added to the mortgage so will cost even more over time.

Our house is worth $255,000 and the mortgage will be for $204,000 with 19 years left.

Essentially, am I better to fix for 3yrs at a lower rate than for 5yrs at a higher rate? My thoughts jump between a lesser monthly cost (and a saving of $1620 dollars over the first 3 years + a smaller fee) vs 2 more years of rate security (particularly as interest rates are set to rise). However, after 3 years our mortgage will be less (we've always overpaid and I'd like to continue this) and potentially worth more (with the renovation it'll bev worth close to $300,000. The more equity you have, the lower the rate.

Essentially, is a bird in the hand is worth two in the bush?

While I know mustachians can't see the future, any thoughts much appreciated.

Ziggurat

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Re: Lower short-term mortgage costs v possible longer term rate rise dilemma!
« Reply #1 on: February 25, 2014, 11:42:36 AM »
Everyone is saying rates "can only go up" but I don't agree.  While they probably have nowhere to go downwards, they could also stay where they are, or nearly so. People tend to think everything goes in cycles, but rates are a really a supply-and-demand thing. I don't see why we will have a tight supply of money to be lent out in the next number of years. There is plenty of wealth out there (good portion of the baby boomer generation) looking for reliable returns.

Even if rates do go up, what if the significant up-turn happens four years from now? Then you would have been better off locking in after the three-year term.

BUT ... if you need the security (i.e. significantly higher rates would ruin you) then it makes sense to lock in for a longer time period for the peace of mind.  Personally, I don't think they are going to rise to the high levels we have seen in the past, any time in the next five years.

scottishstubble

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Re: Lower short-term mortgage costs v possible longer term rate rise dilemma!
« Reply #2 on: February 25, 2014, 05:19:45 PM »
Thanks for your comments Ziggurut. While rates may well rise from rock bottom, like you I'm beginning to think that low rates are the new normal (if there is such a thing as "normal" in monetary policy).

Prairie Stash

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Re: Lower short-term mortgage costs v possible longer term rate rise dilemma!
« Reply #3 on: February 25, 2014, 05:37:09 PM »
we have the same problem in Canada with terms, except I didn't pay a fee the last time I renewed.  The fee isn't very much, it's not really the big issue; 166/year or $200/year.  You'll likely have fees similar to that for the remaining 19 years, it's better to compare the annual fee rate IMO.

Personally I'd go 3 year, a sure thing over a possible future scenario. If they do start rising you'll also have the option of locking in after 3 years and then ride out the next remortgage for 5 years, while watching rates climb still. 

scottishstubble

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Re: Lower short-term mortgage costs v possible longer term rate rise dilemma!
« Reply #4 on: February 26, 2014, 05:21:03 AM »
Thanks Prairie Practicality. Yes, the fee isn't a huge issue and as you say the cost per year is pretty similar. I'm still leaning to the 3 year deal (I was even looking at a two year deal this morning where the rate was 2.59%). Decisions decisions!