Switch to 22 year fixed rate or stay with 7 year fixed rate?

[Sunnysoutheast]

We switched to Avant 7 year 1.95% rate in January 2022 - monthly mortgage is now €1033.

Thinking of moving to 2.5% fixed rate with Avant for remainder of term (22 years) with a monthly mortgage payment of €1093 per month (no break fee). Reason: security. In 7 years time when we come off the fixed rate mortgage rates could be a lot higher!

Thoughts?

Our mortgage broker is saying a lot of new customers are opting for fixed rates over a long period. Note: approx 2% early redemption fee if we did have a lump sum in the future to pay off mortgage, also can pay 10% off mortgage balance in any one year.

 

[Brendan Burgess]

Assuming a balance of 100k, you will pay €11,800 interest over the next 7 years if you stay as you are.

If you fix for 20 years at 2.5%, you will pay €15,300 - so an extra €3,500 in interest

The balance will be down to around €73,000 after 7 years. €3,500 represents about 5% of that balance.

So let's say that you can fix at that stage for 3.5% instead of the 2.5% you would be fixing at now.

You would be still ahead for the next 6 years or so. After that you will be losing.

It's much of a muchness.

Your current balance is about €230k?

There is a fair chance that you will trade up or overpay this significantly over the next 7 to 13 years.

I think I would stick to the 7 years rate.

Brendan

 

[Sunnysoutheast]

Yes we have a balance of approx €225k.

So are you saying that the mortgage balance left to pay in 7 years time will have reduced enough that even a fixed rate of 3.5% in 7 years time would be just as good as a 2.5% fixed rate now?

 

[Brendan Burgess]

I am not quite saying that.
You will have saved €3,500. (based on €100k)
Your balance will be €74k
After Year 7 any rate in excess of 2.5% will "use up" the €3,500 savings.
You could probably do a longer calculation to show that if you keep your mortgage for the full 22 years, you would be better off fixing at 2.5%
But I reckon you may well have traded up or overpaid your mortgage in the meantime.
So I would go for the bird in the hand.

Brendan

 

[Sunnysoutheast]

Thanks Brendan.

We won't be changing house and it's unlikely we will overpay the mortgage during the mortgage term.

How would I do the longer calculation you mention?

 

[Paul F]

@Sunnysoutheast Here is how your mortgage would look if you fixed now at 2.5% for 22 years:
Fix for 22 years at 2.5% (A)

And here is how it looks if we pretend that you stay on a 1.95% rate for 22 years:
22 years at 1.95% (B)

The breakeven rate (the rate you need to beat in 7 years' time) is about 3.1%. I estimated that by looking for a rate such that
(total interest on A = 7 years of interest on B + 15 years of interest on C)
15 years at 3.1%, starting in 2029 after having spent 7 years on 1.15% (C)

That is, if you can get a 15-year fixed rate at less than 3.1% in 7 years' time, then staying on the 1.95% rate now will have left you better off.

But if you can only get a 15-year fixed rate at more than 3.1% in 7 years' time, then fixing at 2.5% for 22 years now will have left you better off.

Of course, you wouldn't have to fix for the full 15 years in 7 years' time but your "average" rate (in some sense) would need to be less than 3.1% over the final 15 years.

 

[Sunnysoutheast]

@Sunnysoutheast Here is how your mortgage would look if you fixed now at 2.5% for 22 years:
Fix for 22 years at 2.5% (A)

And here is how it looks if we pretend that you stay on a 1.95% rate for 22 years:
22 years at 1.95% (B)

The breakeven rate (the rate you need to beat in 7 years' time) is about 3.1%. I estimated that by looking for a rate such that
(total interest on A = 7 years of interest on B + 15 years of interest on C)
15 years at 3.1%, starting in 2029 after having spent 7 years on 1.15% (C)

That is, if you can get a 15-year fixed rate at less than 3.1% in 7 years' time, then staying on the 1.95% rate now will have left you better off.

But if you can only get a 15-year fixed rate at more than 3.1% in 7 years' time, then fixing at 2.5% for 22 years now will have left you better off.

Of course, you wouldn't have to fix for the full 15 years in 7 years' time but your "average" rate (in some sense) would need to be less than 3.1% over the final 15 years.

That's really helpful, thank you @Paul F

 

[BigBoots82]

The value of money may be significantly lower in 7 years time also due to inflation. I'd be staying where I was if I were you

 

[Paul F]

Edit: there is a much more detailed discussion about this in a new thread – but I don't think it contradicts what I have said below.

The value of money may be significantly lower in 7 years time also due to inflation. I'd be staying where I was if I were you

If you think inflation is going to be high for the medium to long term, is that not an argument for locking in a low mortgage interest rate for a long time, e.g., 2.5% over 22 years?

E.g., if inflation persisted at around 3% for the next 15 years, borrowing at 2.5% is like borrowing at –0.5% in real terms over that period.

But if you think inflation will only be high for the next 7 years or less, then staying on the 1.95% 7-year fixed rate could be the better choice.

@Sunnysoutheast It's mostly crystal ball gazing, of course – especially over those long time horizons. But your attitude to risk can help you to make a decision. It essentially comes down to: how much would you value the certainty of 22 years on the same rate versus the possibility that doing so could cost you some money? (Or indeed save you some/lots of money.)

And that all assumes that you really don't move home in the next 22 years – you can't take the 2.5% rate with you if you do.