Signing contracts to sell and buy this week - how long fixed rate to choose?

[Protocol]

A friend is signing contracts this week, mortgage is from AIB.

Loan Offer: 2.2% fixed for 4 yrs

Other rates:

2.45% fixed for 5 years
3.05% fixed for 7 years
3.20% fixed for 10 years
Variable = 2.95%

Given the ECB rate rise due next month, and further rises expected, and the rise in LT bond yields at the moment, the friend asks me is it better to fix for longer?


Before I reply to them, I thought I would ask here.

The ECB will increase the main refinancing rate from 0.00% to 0.25% next month, and then might add another 0.50% in Sep, to make it 0.75%

 

[Brendan Burgess]

2.45% fixed for 5 years
3.05% fixed for 7 years
3.20% fixed for 10 years

It certainly is better to fix for 5 years at 2.45% than 7 years at 3.05%. You will pay 3% more up front over the first 5 years. Rates would have to be in excess of 4.5% for the last two years of the 7 to justify that.

So the choice is between 5 years at 2.45% or 10 years at 3.2%.

Very hard to know. On balance, they should probably go for the ten years.

Brendan

 

[lomber]

Piece of mind says fix for 10, they are probably already stress tested for 2 over variable so 5 so can afford it. Who knows where rates will go, they are over 6% in the States now up from 3 a few months ago, ECBalways lags 1-2 years behind the Fed but always follows like a dog in a leash. Dollar hegemony runs the world

 

[NoRegretsCoyote]

2.45% fixed for 5 years
3.05% fixed for 7 years
3.20% fixed for 10 years

I always think people shouldn't try to guess the markets, but instead think of it as insurance. A little bit more expense in the near term to ensure that it doesn't rise above something you can afford over the long term.


That said, either fix for five years or ten. The seven-year rate is awful value compared to the other two.

 

[Steven Barrett]

Do what they are comfortable with. 10 years is a long time to fix. If they want to switch lender over that time, they have to pay a break fee. As Coyote said, don't try to predict future interest rates, you just don't know what the markets will be like in 2032, just like people didn't know what they'd be like today in 2012.

The 4 year fixed is a good rate and not too long. I'd go for that one if it was me.

 

[skrooge]

The mortgage rate/repayment is only half the story.

How large a chunk of their after tax income will be taken up by mortgage repayments? Do they have other commitments (car loan, child care, college considerations etc.) that will limit there ability to absorb higher rates?

For me it's these factors which would determine the length of fixation. No point going with the lowest rate if it doesn't fit with the realities of their situation. While the 4 year looks good I wouldn't have a problem paying that bit extra if I had good reason to think that finances might be constrained in 4 years.