In India the fixed rate is about 2-3% above the prevailing rate (I.e., 12-13% as opposed to 10%) so they kind of pass in that risk to the borrower.
Also here, “fixed” means that the rate is subject to change at fixed intervals as opposed to whenever the central bank changes the prevailing interest rate.
The majority of mortgages are 30 year fixed. The rates don't change and you would be insane to not get a fixed rate mortgage right now with rates at ~3%.
Where are you getting a 30yr fix from? London, 15yr fixes like 4.5% or something equally silly, 10yr also expensive, 5r common. 30, unheard of for retail mortgage?
In the UK the norm seems to be 2 or 5 years. There are 10 years too, and 3 or 7, but I haven't see a 15 year fix.
I'm looking at a new mortgage and trying to decide between a 2 year mortgage (in 2 years I'll have a lower LTV so better rates) and a 10 year (which is slightly more expensive in the short term - 5% extra or so - but will be far more expensive in the long term, unless interest rates go up).
So it's up to me to hedge based on where I think interest rates will be. Might split the difference and go for 5 years.
Alas I no longer have my baserate + 0.25% 25 year interest only tracker mortgage
Options for a 250k house with a 90% (225k) mortgage at 3.09% for 25 years
Fixed for 2 years, you pay £1,077.54 a month.
By year 2 you're down to £212,683, and assuming no crash in prices, but no gain either, you can remortgage to an 85% rate (for the sake of £200 of overpayments - or £8.33 a month)
If rates don't increase in that time, you're then on a 23 year 85% mortgage, fixed for 2.59% for 2 years, your monthly payment drops to £1,022.69
By year 4 you're at £198,621 you're down to 80% LTV and can remorgage to 1.89% on a 21 deal for the next 2 years, your monthly payment drops to £962.16
By year 6 you're at £184,183 you're down to 75% LTV and can remorgage to 1.44% on a 19 deal for the next 2 years, your monthly payment drops to £927.94
No more steps so assume that lasts for 4 years
Total costs over 10 years is £117,960, and you're left owing £149,532
Now instead go for the 3.99% 10 year one and you're paying 3.99%, which leave you owning £160,499 and costs £1,186 a month, so total cost of £142,320
So that 10 year fix costs 36k extra, including 24k in cash.
If house prices go up over the next 10 years your LTV will drop even more quickly so you'll same more money with remortgaging - even with a £1k product fee every 2 years.
So the reasons to fix for 10 years would be
1) You think interest rates are going to shoot up to the point that getting a 3.99% rate on a 2 year fix will be tricky even with a lower LTV
2) You think house prices will crash, meaning your LTV will increase, and you won't be able to get off the standard variable rate
Given in the UK, house price collapse is the most likely think to cause a government to fall, I don' think the 10 year fix makes sense.
I'm already mortgaging at a a good LTV, so I do not expect it to fall further in the next 5 years and I'm willing to pay the premium in exchange to the lower risk although probably financially is not optimal.
But my point is that in Italy I could get a 20 year mortgage with a ~1% fixed rate for the whole period, which is lower than the same LTV UK 2 year rate, which is crazy. I can't believe that the risk of default is generally significantly lower in Italy.
> Interest rates can rise, which would increase the mortgage.
Mortgages are nearly always fixed rate, so that can't happen. That's the beauty of a mortgage, it can only ever go down, never up.
But you're right in that variable rate do mortgages exist, but it would be very foolish to ever take one. Don't do it. Always go fixed rate, you can always refinance down if the opportunity arises, or stay the course if not.
In the US, a 30 yr fixed is the "standard", and even that is not the overwhelming majority that it used to be, with ARM and other financial engineering. Also, The ARMs tend to be lower rates than fixed in the US.
My experience holding mortgages over the last 20 years in the states, ARMs were a strictly better option and would have saved me a ton of money, even with Refis by paying down the principle faster.
But, The last 20 years are unlikely to continue, as it's been a long term decreasing interest rate environment, and there's a limit to how long and far that can happen.
Elsewhere, fixed rates are the exception. And oddly, fixed rates are cheaper in Ireland at least, but with the caveat that you're stuck with the mortgage for the time of the fixed term, unless you are willing to pay a penalty. Forex, I could have had a ~4.x%~ 3.7% adjustable, or a ~3.5%~ 2.9% fixed for 3 years. Amortizations being what they are, the ~3.5%~ 2.9% rate pays down much faster.
(edit -- just checked the actual current rates, which are probably closer to accurate than my just post coffee memory)
The article is about Canada, which has 5 years maximum mortgage term. After 5 years, you need to renew your mortgage at whatever interest rates are currently available.
Yup. If housing drops and/or interest rates climb it will get interesting in Canada:
- you basically refinance every 5 years at max. If you’re underwater on a house, the bank will ask for cash to hit the desired loan-to-value.
- If rates go up you’ll need to be able to afford the higher payments or no mortgage. Luckily they are doing a “stress test” and you need to qualify at 5.XX% today. So there is buffer.
- most of Canada has recourse loans. If you sell and don’t pay off the mortgage, the bank can come after you for the difference.
The fixed rate thing makes a big difference. I'm based in the UK, where most banks only offer fixed rate up to about 5 or 10 years. Interesting that it seems to vary by country.
