Avant Money fixed term 5 years vs 7 years?

[gonesp]

Hi there,

I'm currently in the process of getting a mortgage for a new house. I'm planning to go with a fixed term mortgage but I've got a question regarding the rates as I'd like to understand how the bank is playing their numbers.

I'll be settling for an LTV of about 78% and from all the options I got from Avant Money two of them are standing out for me:

Term	Years	APRC	Fixed rate	Follow-on variable rate	Cost/1000
3 year fixed	30	2.23%	2.15%	2.2%	€3.77
4 year fixed	30	2.23%	2.15%	2.2%	€3.77
5 year fixed	30	2.22%	2.15%	2.2%	€3.77
7 year fixed	30	2.21%	2.15%	2.2%	€3.77

I also had options for 10, 15, 20 and more fixed terms, but I'd like to settled down in a health line where the interest rate isn't too high.

My question, however, is: what is the catch in these rates? Why are they almost the same and the fixed term is different?

I was under the impression that the higher the fixed rate, the more protection the bank would be seeking, placing interest rates higher. Can anyone help me understand why is the difference between them so low and what should I consider in going with a 7 year fixed term or a 3 year fixed term, for example?

Thanks in advance!

 

[skrooge]

Not sure what catch you're looking for. Avant can afford to undercut existing lenders across various fixed rates and still make money. I haven't checked the yield curve in a while but assuming it's upward slopping they are making slightly less money on the longer term fixes than the shorter term.

What fixed term you should go for is really down to you and your financial position. There's usually a trade off between the certainty that a fixed rate mortgage provides versus the flexibility of a variable rat. However, Avant do offer a lot of flexibility. Some general points to consider:

The greater the percentage of your income going on your mortgage the more sensitive you are to interest rate movements. In that case you'll probably benefit from the security of a longer fix.

Avant allow you to overpay by 10% of the balance per annum so that should allow for an element of flexibility.

If you're in a position to clear your mortgage balance before the end of the fixed rate period your break fee will be capped at 2%.

Without knowing your financial position is hard to be definitive. However, I'd be looking at the 7 years option and would need good reason to look at anything shorter given their flexibility and low rates across the board.

 

[gonesp]

Not sure what catch you're looking for. Avant can afford to undercut existing lenders across various fixed rates and still make money. I haven't checked the yield curve in a while but assuming it's upward slopping they are making slightly less money on the longer term fixes than the shorter term.

What fixed term you should go for is really down to you and your financial position. There's usually a trade off between the certainty that a fixed rate mortgage provides versus the flexibility of a variable rat. However, Avant do offer a lot of flexibility. Some general points to consider:

The greater the percentage of your income going on your mortgage the more sensitive you are to interest rate movements. In that case you'll probably benefit from the security of a longer fix.

Avant allow you to overpay by 10% of the balance per annum so that should allow for an element of flexibility.

If you're in a position to clear your mortgage balance before the end of the fixed rate period your break fee will be capped at 2%.

Without knowing your financial position is hard to be definitive. However, I'd be looking at the 7 years option and would need good reason to look at anything shorter given their flexibility and low rates across the board.

Hey! Thank you for the information, that's a pretty interesting assessment of the situation.

The mortgage monthly payment would end up being 16% of my household income. Would you need any more information?

 

[skrooge]

Not sure if that's net or gross income but regardless it's a small enough number that you're likely to be reasonably well positioned to deal with a rate increase. But unless you're planning on being in a position to clear the mortgage in under 7 years I wouldn't see a strong argument for taking that risk now.

 

[Dave Vanian]

With inflation rising, interest rates in UK and US starting to be raised again and even the ECB being more guarded in their language about the possibility of rate increases, my hunch is that fixed rates will rise. Personally I'd grab the longest one out of the options you show, while it's available.

 

[smndly]

I'm looking at switching to an Avant 5 or 7 year mortgage myself. However, we would likely look at upsizing or house in 4-7 years. If, in the likely event ECB and interbank interest rates rise in that time, am I correct in saying we would likely have a very low or zero break fee if we fixed for 7 years? If so, I think a 7 year fixed rate is the one we'll go for as I see no drawbacks unless interest rates happen to fall which I think is unlikely.

 

[skrooge]

I'm looking at switching to an Avant 5 or 7 year mortgage myself. However, we would likely look at upsizing or house in 4-7 years. If, in the likely event ECB and interbank interest rates rise in that time, am I correct in saying we would likely have a very low or zero break fee if we fixed for 7 years? If so, I think a 7 year fixed rate is the one we'll go for as I see no drawbacks unless interest rates happen to fall which I think is unlikely.

Yes, in general higher interbank rates mean lower or zero break fees. The break fee effectively covers the cost of any forgone interest a bank could have earned had they invested in the interbank mark on the day they lent to you compared with the day you break. If rates have gone up there is no loss.

In any event the break fee charged by Avant will be no more than 2% of any outstanding balance. Even if there is a break fee if you take out a larger mortgage with them within 6 months of the early redemption they say they will refund the break fee.

 

[time to plan]

I'm looking at switching to an Avant 5 or 7 year mortgage myself. However, we would likely look at upsizing or house in 4-7 years. If, in the likely event ECB and interbank interest rates rise in that time, am I correct in saying we would likely have a very low or zero break fee if we fixed for 7 years? If so, I think a 7 year fixed rate is the one we'll go for as I see no drawbacks unless interest rates happen to fall which I think is unlikely.

That's what I'm doing. Any saving you are missing out on in the event that interest rates do in fact small is relatively minor whereas the potential for rates to increase is very significant.